ANALYSIS: the Boeing 757-200 aircraft report

London
Source: Flightglobal.com
This story is sourced from Flightglobal.com

The Boeing 757 has existed in a class of its own for many years, but now as operators look at more advanced alternatives, the aircraft is coming under pressure.

Boeing launched the 757 programme almost 35 years ago with a view to replace the successful three-engined 727 models.

The 757 was developed alongside the 767 widebody model. Both types share a number of systems, while the flightdeck is almost identical allowing a common pilot type-rating between the models.

The first 757-200 rolled out in January 1982, and was first delivered to launch customer Eastern Airlines in December that year, after receiving the US Federal Aviation Administration certification. Eastern Airlines placed the aircraft into revenue service in January 1983, the same month the British Civil Aviation Authority certified the 757-200 aircraft.

Boeing rounded up its 757 programme, which reached 1,050 deliveries, with the final delivery to Shanghai Airlines in November 2005.

Typical passenger accommodation ranges from 178 seats in a three-class configuration up to 239 seats in an all economy arrangement. The 757-200 can fly about 3,900 nautical miles (nm) in a 200-passenger configuration.

Market

Flightglobal's Ascend Online database shows a total of 984 757 aircraft with 111 aircraft in storage. Of this amount, the 757-300 accounts for 55 units.

The freighter fleet totals 219 aircraft with six units in storage. The package freighter (PF) version accounts for 79 units, while the special freighter (SF) version totals 140 aircraft.

The 757-200 passenger fleet accounts for 669 units, including 98 aircraft in storage.

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Rolls Royce's RB211 engine family represents 343 units, while another 326 are powered withPratt & Whitney engines. Of these, 249 PW2037-powered aircraft were in active service at 10 September, while another 46 were stored.

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With respect to geographic distribution, there are 479 aircraft in total in North America, or 71.5% of the total fleet.

US carriers including American Airlines, Continental Airlines, Delta Air Lines and United Airlines still operate large fleets. Delta remains the largest operator with 141 aircraft in service, ahead of United with 126 units. American’s fleet totals 111 aircraft while US Airways has 24 units.

Delta and United are starting to phase out their 757s - the former has 29 aircraft parked, according to Ascend’s senior analyst Chris Seymour.

In July, United said it was taking an aggressive approach to removing the ageing 757-200s from its fleet. The carrier plans to remove its domestic fleet by the end of 2015.

The Chicago-based carrier plans to remove 73 aircraft and replace them with 737-900ERs during the next the next two years, according to United chief financial officer John Rainey.

Most of the domestic 757-200s were manufactured before 1995, and those that were produced later are largely concentrated in United's international fleet. Ascend shows that 90 aircraft were delivered before 1995.

The carrier will sell up to 30 of the outgoing domestic 757s to FedEx, in a deal that was announced in March this year. International 757s will remain in United's fleet for the time being.

A total of 15 Asian and Pacific carriers operate a 62-aircraft fleet, while 10 aircraft are in operations in the African and Middle East regions, with another five units in Latin America and the Caribbean, Ascend shows.

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Europe accounts for 16% of the fleet. There are 23 carriers in Europe operating 108 757-200s, while five units are in storage.

IBA Group’s Jonathan McDonald notes that Russia and the CIS have been a key source of demand for used Pratt & Whitney-powered 757-200s in the passenger sector. “This proves the point that secondary markets generally allow what was once a fairly concentrated operator base to begin to splinter out, thus reducing the concentration effect somewhat.”

Icelandair, which operates 24 Rolls-Royce RB211-powered 757-200s and -300s, both as passenger and freighter variants, is sticking up with the types. The aircraft were built between 1990 and 2002.

Icelandair says it is planning to operate the 757 until at least 2025, as the type is central to its business model that revolves around transatlantic flights from Reykjavik.

Cargo conversion

Boeing developed a factory freighter version, designated the 757-200PF (Package Freighter), in addition to the passenger variants.

There are three passenger-to-freighter (PTF) modification programmes currently available from Alcoa/SIE, Precision Conversions and ST Aero.

Memphis-based FedEx operates 76 freighters with another 17 awaiting conversion.

The cargo operator converted nine 757s in the first-half of the year and, as part of an aircraft modernisation plan, it projects that by May 2018 its 757 fleet will grow to 143 units.

Apart for the FedEx pipeline of conversions, the market has been very slow.

Precision Conversions is expected to convert few aircraft this year. The Portland, Oregon-based modification centre received a supplemental type certificate from the US Federal Aviation Administration (FAA) for its 757-200PCC combi aircraft in May.

The aircraft is configured with 10 full-cargo positions and can seat 54 passengers. It is the first 757-200 aircraft to have winglets.

There is a question mark as to whether the cargo market will fully respect the values in winglets because of the cargo carrier’s utilisation on a yearly basis. “Airframe, engine status, utilization and payload drives the investor’s decision,” says Precision Conversions’ vice president of marketing, Brian McCarthy.

However, he sees the winglet capability opening up conversions for younger candidates.

So far the majority of 757 conversions have involved aircraft in the 1988-91 vintage range, but the winglet certification is expected to increase the range of units from 1992-93 onwards.

He says the “all up” conversion price needs to be in the $13-14 million range to make sense for investors. “Aircraft values have to be in the $6-8 million range depending on the cycles and maintenance status.”

A cargo conversion is priced at $4.5 million, he says, but additional work may include the landing gears, airframe maintenance as well as optional weight upgrades.

According to him, Rolls-Royce engine shop visits cost $3.5-3.8 million per engine while Pratt & Whitney’s cost is around $2.8 million.

McCarthy says 757-200 passenger values are currently low. Rolls-Royce-powered aircraft with 3,000-4,000 cycles left would trade in the $3-3.5 million range while Pratt & Whitney’s 757s are going for a premium at $3.8-4.2 million. “There is a shortage of Pratt & Whitney’s powered aircraft and they are becoming more popular.”

CMVs and Lease Rates

ICF SH&E says advertised availability, as of June 2013, stood at 29 units, 24 of which are passenger aircraft while the stored fleet totalled 108 aircraft, of which 97 were passenger configuration.

“Approximately 14% of the 757-200 passenger fleet is listed as in storage, a level that ICF SH&E considers high. While some of these aircraft are awaiting conversion to freighter configuration, a sizeable number of these aircraft are unlikely to return to service,” says ICF SH&E’s principal Stuart Rubin.

Not surprisingly he sees current market conditions for the model as “soft”.

“Over the near term this condition is expected continue as first-tier operators remove the type from their fleets in favour of more fuel efficient aircraft. Freighter conversions will absorb some of this lift -typically aircraft with higher maximum take-of weights - but many 757-200 aircraft will soon be going through the end of life cycle processes, including removal of key rotable components from the airframe, and removal of the engines to burn off any remaining green-time, before being disassembled for parts,” says Rubin.

IBA estimates that around 57 757-200s have either been parted out, or are at least known to be permanently retired and ready to be parted out. Out of those, about 15 are Pratt & Whitney-powered aircraft, mainly ex-Delta machines.

“Part-outs have been limited - just eight since the start of 2012, split equally between Rolls and Pratt powered aircraft,” says Seymour.

Seymour is of the opinion that Rolls Royce’s control of the engine aftermarket for its variants could act as a disincentive for part-out since there is no real market for engine spares.

Old airframes are now selling between $800,000 and $1.2 million, according to McCarthy and he sees a $5-6 million part-out value as the norm going forward. “There is an abundance of 757s on the horizon as passenger airlines continue to exit the model.”

Collateral Verifications says values have dropped 15% during the past year, with lease rentals down by less than 5%.

“As more aircraft reach 15 years of age and beyond, however, I believe that this will put further pressure on values for the passenger models, which will become less and less attractive to operators due to the higher costs of maintaining the aircraft, especially for Rolls Royce-powered aircraft,” says Dechavanne.

“Values have eased down slightly in the second quarter, but the type has been a good value performer for an out-of-production type,” says Seymour.

IBA says values of 757-200s aircraft are dependent on the maintenance condition of the aircraft, particularly of the Pratt & Whitney engines as the overhaul costs and life limited parts cost is expensive relative to the trading values even after pro-rating such adjustments.

The appraiser firm concedes it traditionally perceived the PW2037/2040 powered 757-200s as a minority variant with a relatively concentrated operator base when compared to the more popular Rolls Royce-powered variants. Consequently, it had made a small negative value adjustment to the Pratt & Whitney-powered aircraft as it was feared the re-marketing prospects might be less than for those of the Rolls-Royce powered aircraft.

“This all changed once the passenger to freighter programme settled down as key recipients of the freighter conversion programme, such as FedEx, were comfortable with the two engine variants. The argument for appraisal firms to attribute value premiums for Rolls powered aircraft over Pratt & Whitney powered became harder to support,” says McDonald.

A 1984-vintage 757-200 powered by PW2037 engines has a current market value of $6.3 million according to ICF SH&E, $5.9 million for Ascend. IBA Group values the same vintage at $5.2 million while Collateral Verifications has $4.5 million and MBA has $4.6 million.

A 20-year-old 757 has a $9.5 million current market value for ICF SH&E. IBA Group and Collateral Verifications value the aircraft at $9.1 million while Ascend and MBA are at the lower end with $7.4 million and $7.5 million, respectively.

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Values for a 1998-vintage model range from $10.9 million for Ascend and MBA to $12.2 million for ICF SH&E. IBA has $12 million while Collateral Verifications, values the unit at $11-12 million.

Ascend and IBA Group value a 10-year-old aircraft in the $17 million-range. Collateral Verifications values the model in the $15-16 million range. ICF SH&E says the current market value is $15.8 million, while MBA says the value is $16 million.

“We see the values dropping especially on the older vintages, but there is still a very good market for the 757-200 especially in developing areas of the world where some carriers are expanding their fleets,” says Tom Burke of MBA.

Lease rates are between $90,000 and $110,000 for a 1984-vintage aircraft, according to ICF SH&E. MBA has a $100-130,000 monthly rental range. Ascend has a $100,000 a month range while Collateral Verifications and IBA have $90,000 a month.

ICF SH&E says lease rates for a 20-year-old aircraft are between $130,000 and $150,000 a month. MBA has a $120-130,000 range, while Ascend says $115,000. IBA and Collateral Verifications are more optimistic with a rental of $140,000 and $135,000 a month, respectively.

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A 1998-vintage model is expected to lease between $140,000 and $180,000 a month, according to MBA, while ICF SH&E says $160,000 and $175,000 a month. Ascend has a $155,000 monthly quote, while Collateral Verifications has a $140-170,000 lease rental. IBA Group is the most optimistic with a $160-185,000 a month for a 15-year old aircraft.

A 10-year-old aircraft would lease between $160,000 and $200,000 a month says MBA, and between $180,000 and $200,000 a month, according to ICF SH&E. Ascend has a $200,000 a month quote while IBA says $180-205,000 a month. Collateral Verifications expects lease rates of $190-220,000 a month.