IN FOCUS: Could last off the line effect usher in cut-price deals?

Washington DC
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With current generation narrowbody orders tapering off in favour of re-engined successors, neither Airbus nor Boeing have established firm end dates for the production of their existing A320 and 737 families. However, conclusion of both lines may provide an opening for an opportunistic buyer to close out each with a comparatively inexpensive "last off the line" order.

Historically, "last off the line" aircraft tend to depreciate faster in residual values than those earlier in a product run, says Eddy Pieniazek, global head of consultancy at Flightglobal's Ascend division.

According to Ascend, a 1999-build 737-300, the last year of production for that variant, suffered a 6.9% yearly residual value decline compared with a 3.4% fall in early build -300s.

Bert van Leeuwen, global head of aviation research at DVB Bank, says that the last examples produced of a certain type are generally "written off" a lot quicker. "We've looked at previous generations where the early planes were depreciated by 4% while later ones by 8% or more," he says. This factor, combined with the fact that financiers tend to favour younger aircraft offering more modern technology, "gives us quite some concern about residual value performance, especially the last off the line of the current generation of aircraft", adds van Leeuwen.

The 737-300 had an 8.5% per seat fuel burn disadvantage compared to the similarly sized -700 variant of the 737 Next Generation. The 737-800's advantage over the -400, which it replaced increased to 13% per seat, by virtue of the fact that it was larger than its predecessor.

By comparison, Airbus claims that the A320neo - powered by either CFM International Leap or Pratt & Whitney PW1100G advanced turbofans, will be up to 15% more fuel efficient than today's A320 when it arrives from late 2015. Boeing is targeting a 10-12% improvement in per-seat fuel burn over its 737NG family compared with the Leap-powered 737 Max, which is due to enter service in 2017.

John Leahy, Airbus's chief operating officer customers, says he is targeting a 300 unit A320 "current engine option" (CEO) sales goal to ensure a smooth transition from current to new engine option aircraft, which - depending on customer demand for the A320neo - could be as early as 2018. Production of the current A320 models is rising through 40 units a month to reach a planned peak of 42 a month by the end of the year, although further increases are being evaluated.

The introduction of the A320neo in October 2015 with Qatar Airways will see Airbus's first major transition in its single-aisle variants, as the airframer has favoured blockpoint changes to introduce enhancements and new weight variants for the narrowbody family. Boeing's 737 product run has seen distinct transitions, advancing from the -100/200 to the 300/400/500 Classic and the -600/700/800/900 NG families.

Much of the timing for the conclusion of each production run is tempered by managing the current state of the backlog.

For Boeing, which is sold out through 2016, Pat Shanahan, senior vice president of airplane programmes, says the peak 42 per month 737 rates, which begin in the first half of 2014, will continue for "a good two-year run" as the company works through the 2,223 737NGs it had on order as of 1 March.

Boeing declines to speculate on when 737NG output would conclude, though its current production will run until at least 2018, according to regulatory filings. Top 737 customers Southwest Airlines and Delta Air Lines both expect to take delivery of 737-700s and -900ERs through 2018, respectively.

The first 737 Max delivery is slated for the fourth quarter of 2017 with Southwest Airlines, which launched both the 737-300 and -700.

Taking advantage of Boeing and Airbus eagerness to transition its respective final assembly lines exclusively to its re-engined models may give rise to a significant block order, that exploits the residual market value reality of the late model aircraft, says vice president of analysis for the Teal Group consultancy, Richard Aboulafia.

The profile of a buyer, says Aboulafia, is likely to be an existing customer that can self-finance its own deliveries: "You might not get financial backers to place that bet. They might not want to fall victim to a residual value decline."

In an environment of ever-growing fuel prices, the performance deficit of existing families of aircraft potentially reduces their value in the marketplace, especially compared with side-by-side variations in performance against their re-engined siblings, says Aboulafia.

Aboulafia says that the incentive to end each line is great because the common supply base for each airframer would be producing parts for twice as many models as they currently do, potentially willing to trade the net present value of the increased fuel burn in exchange for price concessions.

"It's by no means clear that you'd want that duplicated capability," he says, despite overlap in most areas of commonality between airframe generations.

The pronounced drop in residual value of the late market aircraft is by no means a certainty for either airframer, says Boeing Capital's managing director capital markets and leasing, Kostya Zolotusky.

Zolotusky points to the significantly larger installed bases of both the 737NG and A320ceo, which now total more than 9,000 aircraft, potentially providing a more gentle depreciation.