ANALYSIS: Appraisers disagree on United 787 values

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United Airlines – part of United Continental Holdings – in its latest capital markets issuance showed discrepancies on Boeing 787-8 values among appraisers, perhaps reflecting a recent focus on the 787-9 model.

The $949 million pass-through certificates, series 2014-1, included for the first time a Boeing 787-9 model, set for delivery in September.

The US carrier asked three independent appraisers – Aircraft Information Services (AISI), BK Associates and Morten Beyer & Agnew (MBA) – to provide new base-value opinions.

The September delivery was valued at $149.4 million by BK Associates, $157.7 million by AISI and $133.2 million by MBA, showing a difference of more than $24 million between the highest and lowest quote.

United says the aggregate aircraft appraised value was $146.7 million, using the lower of the mean and median of three base-value appraisals for the aircraft.

The carrier’s 787-8 pricing was less volatile, though the highest was close to 14% above the lowest.

A May 2014 delivery was priced at $117.9 million by MBA and $132.9 million by AISI, while BK Associates had the highest opinion with $134.3 million.

In last year’s $929.3 million pass-through certificates, series 2013-1, which was issued in August, the same appraisers were asked to provide new base values for a similar delivery, two months ahead.

At the time, AISI was the highest with $129 million, while BK Associates and MBA had similar opinions with $124 million and $123.6 million, respectively.

But in the end, the October 2013 delivery had a “high/low” value differential of 4.4%.

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In this year’s pass-through certificates, a future United 787-8 delivery due October has a new base value of $118.4 million for MBA. This compares with a $124.2 million MBA quote (or $6 million less) for a similar delivery (six months ahead) in last year’s $929.3 million pass-through certificates.

AISI valued October’s new delivery at nearly $144 million compared with $129.7 million for a six-months-ahead delivery in last year’s United capital markets transaction.

BK Associates’ quotes are $10 million apart. In this year’s 2014-1 issuance, it values an October delivery at $135.8 million. Last year, a new delivery was appraised at $125.7 million.

Two years ago, the high/low value differential was in the 2-3% range on the Continental $844 million pass-through certificates, series 2012-2.

Although at the time Continental asked for adjusted base-value opinions on four 787-8s, a December 2012 delivery was valued at $124.8 million by AISI and $123.5 million by BK Associates. MBA was the highest of the three appraisers with $126.9 million.

The change in the high/low differentials could be explained by more airlines and leasing companies switching to the -9 model. Flightglobal has recorded many Asian operators such as All Nippon Airways, Japan Airlines, Jet Airways, Korean Air and Vietnam Airlines announcing changes in their orderbook.

But lessors have also focused on the 787-9 model.

CIT Aerospace converted five 787-8s of its 10-aircraft order into the -9 model in October 2013, Flightglobal's Ascend Online database shows.

At the ISTAT Europe conference in Barcelona that same month, CIT’s president of transportation finance, Jeffrey Knittel, said the 787-8 production delays had proved problematic for the 787-9 model.

“The reality is the airplane [787-8] slipped and that did not help,” he said. “It would have been much better to have the aircraft earlier on to fill a hole [in capacity], and then the evolution toward the -9 would have occurred earlier.”

Knittel believes there is still a gap in the market today and that “opportunity should exist for a while”.

Operating lessors have had differences in opinion about the attractiveness of the 787-8 as an investment for their portfolios.

“The Boeing 787-8 is the initial model of three types and, to me, is a bit like the Boeing 727-100, 737-100, 747-100, the DC-10 and the Lockheed L-1011,” said Steven Udvar-Hazy, chairman and president of Air Lease, at the ISTAT conference. "It is a great airplane, but in terms of a long-term investment for an aircraft lessor, we have different criteria for choosing an aircraft than an airline."

ALC’s orderbook now accounts for 19 787-9 units and 30 787-10s.

At the ISTA conference, AerCap’s chief executive urged lessors to be mindful of ever-changing airline demand for aircraft before determining the value of a unit. “I would be very careful about writing off any airplane too soon,” said Aengus Kelly. “You have to be careful about aircraft trends as they change.”

Kelly, who admitted AerCap was “more focused on the -9”, recalled bankers once offering more money towards an Airbus A330-200 purchase than an A330-300.

“And then the world changed, due to capacity constraints in Asia, and now the A330-300 is probably the most in-demand aircraft in the world, commanding a significant premium,” he said.

SMBC Aviation Capital’s chief executive officer Peter Barrett said the lessor saw a space for the 787-8 in its portfolio.

“I think we would have some appetite for the -8,” he said, agreeing with Kelly that airline demand for aircraft “does tend to change over time”.

He added: “But I see us having more 787-9 than -8s; it [the portfolio split] would be something like one-third, two-thirds, in that range, but ultimately it would be down to what our customers want.”