ANALYSIS: The Boeing 737-400 aircraft report

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The Boeing 737-400 always has been the less popular sibling of the 737-300 as a passenger aircraft, but as a freighter, the unit is increasingly gaining popularity among customers.

In June 1986, Boeing announced plans for a new higher capacity version of the fast-selling 737-300 as an answer to the Airbus A320. The 737-400 was consequently developed as a 150-seat aircraft, essentially replacing 727 fleets. Although Boeing initially developed the 180- to 200-seat 757 models to replace the 727 fleets, a considerable market still existed for a near-direct-size replacement of the units.

The 737-400 first flight was in February 1988 and the aircraft entered service with Piedmont Airlines in October that year.

Commonality exists between the 737-300 and 737-400, but the 737-400 has a larger fuselage.

To cope with the increased weight, the aircraft is equipped with more powerful CFM56 engines. The aircraft is powered by two 22,000lb CFM56-3B2 turbofans or optionally 23,500lb CFM56-3C1 engines.

Market

The 737-400 programme generated a total of 530 orders, with 486 aircraft delivered and 44 units cancelled.

Today there are 369 737-400 passenger aircraft and 249 in active service with 70 operators, according to Flightglobal’s Ascend Online database. That compares with 470 aircraft in operation with 74 operators in 2006.

An estimated 324 units are powered by the 3C1-powered, while the remaining 45 are -B2 powered.

Of the 324 C1-equipped fleet, about 95 aircraft have a maximum take-off weight of 150,000lb.

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An estimated 95 units in storage are powered with -3C1 engines while another 25 are equipped with the -3B2 powerplant.

The rate of part-outs has been remarkably low but is slowly increasing. Ascend shows that 11 737-400s have been withdrawn from service since the beginning of the year, compared with four aircraft in 2012, and five units in 2011. The previous two years recorded a total of five 737-400s that were removed from service.

Asia-Pacific represents the largest market for the type with an estimated 123 aircraft, or about a third of the market. A total of 41 737-400s are in storage.

Europe accounts for 103 units (28% of the market) with 21 aircraft in storage. This compares with 178 aircraft in September 2006, or about 38% at the time.

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North American operators have 53 aircraft in active service and another 45 are stored.

There are 38 aircraft in Africa and the Middle East, compared with 10 units seven years ago. Nine 737-400s are in storage.

The Latin American fleet accounts for six aircraft with half of the units in storage.

The 737-400 initially penetrated the Western Europe region through first tier airlines and charter airlines. During the past 10 years, the model has expanded into Eastern European and Russian markets. Aerosvit Airlines, Ukraine International and Transaero Airlines have gradually increased their fleets while new operators such as Orenburg Airlines have introduced units to their fleets.

The 737-400 also found applications in the charter market in the past few years with Flair Air, First Air, Futura International Airways, TUI, Ryanair International, Travel Services and Centralwings, while Turkish carriers Corendon Air, MNG Airlines, Pegasus Airlines and Sky Airline all operated the model before transiting to the 737-800 aircraft.

Many top-tier operators such as British Airways (19 units) still operate the aircraft, although the UK carrier will start phasing out of the model in 2014 as it takes more Airbus A320s.

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Alaska Airlines, despite operating 737-800s, still operates 24 737-400 passenger and cargo aircraft.

Malaysia Airlines and Qantas have 28 and 10 units, respectively, but both carriers have half of their 737-400s in storage.

Recent activity include additions in Poland (Enter Air), Indonesia Lybia (Buraq Air), Afghanistan (Ariana), Pakistan (Shaheen Air International), Thailand (City Airways), as well as in Ukraine and Russia.

The 737-400 has also founded application outside its core markets.

In Chile, One Airlines started-up operations last month with two wet-leased Xtra Airways units connecting Santiago de Chile and Concepción to Antofagasta, Calama, Copiapó and Iquique. The new carrier operates mining charters flights.

South Africa’s new low-cost Safair is still waiting approval to start operations with a three 737-400 fleet.

Brazil’s Rio Linhas Aereas is adding two 737-400F aircraft next year, both 1992/94-vintage units previously operated as passenger aircraft by Air Nigeria and Sky Airline. Next month Colt Taxi Aereo will take an ex-Royal Air Maroc recently converted aircraft. Boeing 737-400SF (26530) aircraft with CFM56-3C1 engines from Aircraft Solutions Lux VIII. The 1994-vintage aircraft was previously operated by Royal Air Maroc.

ICF SH&E’s principal Stuart Rubin says several factors including sustained high fuel prices, the availability of newer 737NG and A320 family aircraft at very attractive pricing, availability of low financing rates and the increased involvement of export credit agencies (ECAs) in financing new aircraft have contributed to weaker demand for older aircraft as market conditions improved.

Rubin says the stored 737-400s represents over 26% of the current fleet and it is unlikely many of these aircraft will return to service. “Those operators that currently fly the aircraft are likely to continue to do as long as lower capital costs offset the greater fuel burn of the type relative to competing aircraft.”

Cargo conversion

The future for the 737-400 as a passenger aircraft appears fairly limited, but in cargo market, the unit continues to gain interest as an upgrade for the 727F and 737-200F fleets.

Alaska Airlines contracted Pemco World Air Services in 2005 for the first conversion of a 737-400 aircraft from passenger-to-freighter and passenger-to-combi, as part of a $100 million plan to expand and modernise its cargo operation.

The 737-400 combis, with a combination of four cargo pallets and 72 passengers, and the 737-400Fs, replaced the carrier’s fleet of seven 737-200Fs with 20% more cargo hold.

At the time, pricing for the basic conversion was around $3 million per aircraft and aviation and aerospace management consulting firm AeroStrategy predicted that 200 737-400s could be converted during the next 10 years.

A total of 10 737-400 combis are in service, with half belonging to Alaska Airlines. The freighter programme has been more successful with 46 units in service.

There are 21 737-400Fs operated in Europe, 16 in the Asia Pacific , four in Africa, the Middle East and Latin America, and one in North America.

Aeronautical Engineers (AEI) will deliver about 22 conversions this year, including 18 737-400s. It forecasts 35 deliveries in 2014 and more than 40 conversions in 2015 when its CRJ conversion programme starts.

Vice president of sales and marketing Robert Convey says a 737-400SF, 11-pallet conversion costs $2.7 million, up from $2.53 million for a 737-300SF, 10-pallet conversion.

According to him, the conversion candidates include 1992- to 1998-vintage aircraft.

Converted freighters can lease up to $140,000 a month, depending on the credit, according to a leasing source, although he admits $125,000 is the average rate. Another source indicates lease rates in the $120-140,000 monthly range.

The lessor says a cargo conversion with maintenance work can cost $3.7 million for the investor.

However, he says aircraft prices need to become “relatively low” to make the investment viable. “This is because cargo operators fly 100 hours a month while passenger operators are operating in the 200-250 hour bracket,” he says.

Converted freighters can sell for $8 million, says the lessor source.

Values and lease rates

In 2003, first 737-400s were scrapped due to the soft economic environment, but lease rates increased again in the second half of the decade mainly due to a shortage of 737-300s.

By 2006, lease rates were $135,000 a month for the oldest units, while a 1998-built model leased for $200,000 a month. Like the -300 model, lease rates reached their peak before the 2007 crisis.

Pre-2007 storage levels showed only 15 aircraft parked. At the time, North American fleets were heading to Asia and Eastern Europe with new operators using the aircraft on shorter routes.

The high gross weight and -3C1 powered examples are still the most marketable whilst lower and non-EFIS examples are difficult to place, says Ascend.

The fleet is expected to continue to shrink as -400 operators continue to upgrade to the 737 Next Generation (NG) model or A320 family models.

The 737-400 is a sale market, says a source, with values “trading low” as a result of a downward pressure on used 737 NG aircraft.

The stored fleet represents a third of the total fleet and potential buyers are now “very selective”, he says.

Age restriction is also a concern for some traders as potential upgrades in order to enter a certain jurisdiction could prove costly. One trading source says putting an aircraft back to the European Aviation Safety Agency (EASA) register can cost as much as $1 million.

Monthly lease rates, which once traded at $100,000, now trade in the $70,000 to $80,000 range.

One source indicates he has signed three-year lease extensions at $75,000 a month.

A trader reveals he has placed aircraft between $55,000 and $65,000 a month, or “virtually at the levels of two good CFM56 engines”.

Sale prices vary between $2 million and $4 million, according to a trading source.

One trader believes $3 million is the “top of the market” because of the downward pressure from newer models.

Another source indicates the airframe value is “virtually nothing” and part-out companies are no longer interested in breaking up aircraft because a “professional company is needed for the scrapping as well as an extra $50,000”.

He adds: “You may sell the engines, but then you may have parts sitting in a warehouse meaning you need to pay a storage fee along with insurance.”

The source says the value of a 737-400 is equivalent to the “green-life” remaining on the engine.

A trading source says the airframes are valued between $100,000 and $150,000, while another trader puts the value between $130,000 and $200,000 for younger models.

Run-out aircraft currently trade in the $150,000 range, says a lessor, while a trader indicates the range is between $200-250,000.

IBA senior analyst Jonathan McDonald says retirements and part-outs, like all CFM powered 737 Classic models, are an all too often occurrence now. “For years, there has been a great deal of speculation as to what British Airways will do with its once 19 strong fleet at London Gatwick airport. The answer now seems more clear. By mid-November, three of those aircraft had been stood down and ferried to Victorville, for storage and almost certain part-outs. It is likely the remaining 16 examples will gradually dwindle down to service end around the end of 2015,” he says.

Ascend says lease rates last fell 18-24% at the start of the second quarter of this year and are likely to see more pressure as more phase-outs continue.

Collateral Verifications’ vice president Commercial Aviation Services Gueric Dechavanne says lease rentals have dropped by 15% over the past year, but may have reached the bottom.

“This aircraft will not rebound greatly from a value or lease rental perspective.With the increase in production from the manufacturers of new single aircraft, the focus will either be newer aircraft or older A320/737NG aircraft with the newer engine variants.”

Collateral Verifications sees monthly lease rates between $60,000 for a 1988-vintage aircraft and $87,500 for a late-built 737-400.

Ascend has a relatively similar range with $65,000 a month and $90,000 a month for 1988 and 1999-vintage aircraft. IBA Group has a $60,000 to $70,000 a month range for a 1988-vintage aircraft and $90,000 to $100,000 for a 1999-built aircraft.

MBA says lease rates are relatively flat as the difference in rentals by age is narrow. The appraiser firm, along with ICF SH&E, see lease rates as low as $40,000-$50,000 a month for older vintage aircraft. Newer aircraft would range between $65,000 and $90,000 a month while ICF SH&E has $80,000 to $90,000 monthly rentals for a 1999-built 737-400.

Dechavanne believes older vintage aircraft will continue to be viewed as part-out candidates ‘at best’ and/or remain stored indefinitely. But he sees the cargo conversion market stabilizing values for younger aircraft. “Based on the feedback received from the market, converted aircraft seem to be valued in the $6 million to $9 million range with lease rates in the $95,000 to $150,000 range per month depending on the vintage.”

He opines a 1988-vintage CFM56-3C1-powered aircraft with a maximum take-off weight of 150,000lb. has a half-life current market value (CMV) of $2.4 million.

IBA Group has $3.1 million for that vintage while Ascend and ICF SH&E is $3.3 million and $3.4 million, respectively.

MBA is the highest of the appraisers with $3.5 million for a 25-year of age aircraft.

A 1999-vintage aircraft is valued at $6.6 million for MBA, $5.7 million for IBA Group, $5.5 million for Collateral Verifications.

Ascend has $4.6 million but ICF SH&E is the highest with $7.2 million.

Appraisers are within $1.1 million range for a 21-year old aircraft. Ascend and Collateral Verifications are the lowest of the appraisers with $3.2 million and $3.3 million, respectively while ICF SH&E is the highest with $4.3 million.

IBA Group ‘s CMV $3.9 million for that vintage while MBA has $4.2 million.