How long an aircraft is economically viable has long been debated.
US airlines are known for flying planes past their 30th birthday while many Asian carriers typically replace fleets after little more than a decade in service. The long-standing assumption of an aircraft's economic life is about 25 years among aircraft owners and financiers.
A shrinking market for used aircraft has panellists at the Ascend Aviation 2020 Finance Forum in San Francisco on 28 and 29 November questioning whether the 25-year assumption needs to be reconsidered.
"You're playing games if you think it's going to go to 25 years," says Brian Postel, executive vice-president of Universal Asset Management, on an aircraft's economic life.
"[Aircraft] lives are definitely shortening," says Joe O'Brien, executive vice-president of sales at ELFC. He says that the economic life of narrowbodies should be shortened to between 15 years and 20 years.
Three forces are widely cited as driving the debate. One, the increased availability of new aircraft at attractive prices or lease rates, two, rapidly decreasing values of ageing aircraft is making parting them out a competitive option and, three, less comfort among lenders with the risk profile of older aircraft.
Airbus and Boeing each have backlogs for thousands of new narrowbodies and are increasing production to meet demand. Participants at the forum largely attribute this to attractive aircraft prices and cheap financing from both the capital markets and export credit agencies (ECAs).
Eric Adema, a principal at Vx Capital Partners, says that cheap financing from ECAs has allowed numerous airlines from emerging Asia and Africa to buy new aircraft and skip an entire generation of jets. He explains that if the market was functioning as it used to these airlines would be buying the coming retirements of used Airbus A320 and Boeing 737 Next Generation aircraft.
Richard Walker, head of customer market development at Airbus, has another explanation for the increasing numbers of new aircraft: "In a word, demand."
"It's boys and their toys," adds Bert van Leeuwen, global head of aviation research at DVB Bank.
Not everyone is buying new. Las Vegas-based Allegiant Air and Atlanta-based Delta Air Lines are well-respected carriers that continue to buy older aircraft on the used market. Allegiant announced deals with Cebu Pacific and GE Capital Aviation Services to lease 19 A319s in July, and continues to look for used Airbus narrowbodies.
Delta sub-leased 88 Boeing 717-200s from Southwest Airlines and Boeing Capital in July, and continues to buy Boeing MD-90s on the used market. A source at the airline says that more deals are possible but that they will likely be for just one or two aircraft and not an entire fleet.
The increasing availability of new aircraft is pushing down the value of older types. Citing Ascend data, Leeuwen says that a 10-year old A320 is valued at about 43% of a new model today compared to 65% of a new A320 in 2000 - a 22-percentage point decline for the same aircraft a decade later.
"I'm a bit worried about what's going to happen to the value of [new] A320 aircraft that are coming off the production line between now and say 2015," he says. The A320neo is slated to enter service that year as production of the current variant begins to wind down.
The decline in values for older aircraft has made parting out an increasingly attractive option to owners. Jude Bricker, senior vice-president planning and treasurer of Allegiant, says that the airline finds itself competing with the sector due to its valuations for used A319s and A320s, which it puts at between $12 million to $13 million for a 12-year old aircraft.
"When the airplane trades at that value, then you're competing with the part out guys," he says. Allegiant bases its valuations on the maintenance and parts value of the aircraft as well as an operator premium, the latter of which the part out sector does not pay.
Lessors say that they also face the decision of whether to part out aircraft as they get older or to lease them again.
Lenders say that they would finance older aircraft with caveats, when asked by Allegiant executive Jude Bricker. Caveats include the borrowers credit quality and aircraft's age, panellists say.
"It's a residual value problem," says Robert Papas, director of aviation finance at BNP Paribas. He explains that the bank lacks the in-house capacity to value older aircraft that it has to value newer variants, which in turn makes credit committee approval of loans for the asset class more difficult.
The fact that the older planes are often the first out in favour of newer aircraft when airlines go through bankruptcy adds to their risk profile, adds Papas.
American Airlines is operating under chapter 11 bankruptcy protection and all of the US mainline carriers except Southwest Airlines have gone through bankruptcy during the past decade.
Richard Moody, head of aviation financial solutions at Deutsche Bank, says that fewer portfolio financings of older jets is also an issue for lenders. Large banks are often better suited to large deals or high volume transactions.
"Institutions have a black box of what they can and cannot do," he adds.
Not everyone is as hesitant. Leo Burrell, a managing director at Credit Agricole, says that he sees a "great" opportunity in financing older aircraft because the bank can achieve good advance rates and coupons on the deals.
Aircraft can continue to fly well past their 25th year but the combination of the aforementioned factors are changing the economics of keeping these planes in service.
Bricker says that Allegiant will not keep its incoming A319s beyond their 23rd year because of high routine maintenance costs when they hit 24 years. He explains that the reason it continues to fly its ageing MD-80 fleet, which has an average age of 23 years according to Flightglobal's Ascend Online database, is because of the large number of used engines it anticipates will come on the market as American Airlines retires its fleet of the narrowbodies. This will allow Allegiant to avoid costly engine overhauls on the aircraft.
"Engine OEMs [original equipment manufacturer] are really putting the clamp down on a lot of [older] engines," says Postel at Universal. He says that companies, including GE and Rolls-Royce, will probably force the retirement of some older aircraft due to increasingly costly and onerous engine overhaul requirements.
The standard economic life for an aircraft may or may not remain 25 years, but whatever happens the skies will increasingly be filled with newer aircraft just on the order backlogs alone.