June's Aircraft Report: the Boeing 737-700

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

The Boeing 737-700 is a shortened version of the -800 model capable of carrying 126 to 149 passengers, effectively replacing the 737-300 series in Boeing's lineup. Its direct competitor is the Airbus A319.

Boeing initiated development of an updated series of its 737 Classic aircraft in the early 1990s.

The performance of the 737 Next Generation (NG) is essentially that of a new aircraft, but important commonality is retained from previous 737 models. The wing was modified, increasing its area by 25% and span by 16 ft. (4.88 m), which increased the total fuel capacity by 30%.

The first NG aircraft to roll out was a 737-700 in December 1996. It was awarded type certification by the US Federation Aviation Administration in November 1997 and was first delivered the following month to Southwest Airlines. It entered service operations in 1998.

As with the other members of the 737 NG family, the CFM56 is the sole engine. A total of 120 aircraft are equipped with -7B20 engine variant, the lowest thrust powerplant in the family. The -7B22 engine variant is the most popular engine with a total of 671 aircraft. Another 264 aircraft powered by -7B24 engine variant while the -7B26 and the -7B27 engine variants have only attracted 40 and 14 aircraft orders, respectively.


The 737-700 drew its first orders in 1993 and by the time it was first delivered in 1997, more than 200 firm orders had been placed.

The programme had two peaks in terms of orders. It recorded 134 sales in 1998, 159 in 1999 and 275 in 2000 as well as 146, 215 and 235 sales between 2005 and 2007.

According to Flightglobal's Ascend Online database, there were 1,084 aircraft in service and 27 stored aircraft as of 25 June 2012.

Four years ago, there were a total of 956 aircraft in service with the North American region representing 504 aircraft.

Today North America accounts for 581 aircraft in service and 14 stored aircraft. By 2013, the fleet will grow to 605 units. Southwest Airlines operates a 424-aircraft fleet, with half of the current fleet equipped with the low thrust engine (22,700 lbs). The carrier has a backlog for 127 aircraft of the type.

The second market for the 737-700 is Asia-Pacific with 213 aircraft in operations. Asian Airlines have a further 18 aircraft on backlog.

The European fleet totals 130 aircraft at present and is expected to peak at 146 units by the end of 2014. Of the 27 aircraft in storage, 13 are based in Europe. Ascend expects the Europe storage fleets to triple by 2017. backlog with European customers stands at 18 aircraft.

There are now 47 aircraft in service in the Africa and Middle East region while the Latin America and Caribbean fleets total 113 aircraft.

The operating leasing community accounts for 37% of the current fleet with 398 aircraft. Lessors represent 21% of the total backlog with 66 units, compared with 32% of the total backlog in 2008.


Backlog is estimated at 205 units, including 199 737-700s equipped with winglets and six with no winglets. Another 125 aircraft are on option.

Boeing delivered 44 aircraft to customers last year, up from 27 in 2010, but down from 53 and 62 aircraft in 2009 and 2008, respectively.

The programme is slowing down with only three deliveries have been made to China Southern Airlines and GECAS since the beginning of the year. Another 11 aircraft are scheduled to be delivered to Aviation Capital Group, China Eastern Airlines, China Southern Airlines and TUIfly in the second part of this year.

Southwest Airlines has 127 aircraft on order through 2017, or 42% of the total backlog. Aviation Capital Group is the second largest customer in terms of future orders with 51 aircraft scheduled through 2016.


In the first quarter, Aviation Capital Group swapped four 737-700s for the -800 model, along with Aeromexico (six aircraft), airberlin (seven aircraft) and Westjet Airlines (one aircraft).

The 737-700 has found diverse applications over the past 10 years and has been identified by many as the best short haul aircraft if operated in the right configuration and route. However, capacity and range are issues facing the aircraft. An extended range twin operations equipped aircraft with winglets, in a heavy weight configuration can fly up to seven hours. However its 149-seat capacity means that on longer routes, the aircraft competes with widebody aircraft that deliver lower seat costs per mile.


The Malev and Cimber Sterling bankruptcies have created some activity in the secondhand 737-700 market since the beginning of the year.

Russian carrier Transaero has leased the seven Boeing 737-700s that were previously operated by Malev from ILFC. The aircraft were manufactured in 2002 and 2004. Aircastle has placed two 1999-vintage 737-700s previously operated by Cimber Sterling with Jet Time, while the other two units remain available.

In 2008, the Sterling Airlines bankruptcy saw six aircraft returned to Aircastle Investment, while ILFC, Aviation Capital Group and AWAS received one aircraft each. Bavaria International Aircraft Leasing and Pembroke each had two aircraft returned and DAE Capital had one aircraft.

Lessors successfully managed to place the ex-Aloha aircraft after the carrier filed for bankruptcy in the first quarter of 2008. AWAS and Genesis Lease placed two aircraft to VRG Linhas Aereas while ILFC placed one aircraft to Lucky Air in China.

Last year Aerolineas Argentinas announced the lease of 10 737-700s from ILFC with deliveries scheduled through the third quarter of this year. The 10-aircraft fleet was manufactured in 2001 and in 2002 and has been operated by Virgin Australia.

In the first quarter of 2012, CIT Aerospace sold two 737-700s with winglets to BBAM and Nomura Babcock & Brown. Both aircraft have leases attached to KLM-Royal Dutch Airlines.

GECAS has recently sold a new delivery to Banc of America. The aircraft is leased to ConocoPhillips Alaska.

Values and lease rates

Boeing's 737-700 programme has been a successful one and production should continue for some years to come, but the model is being overlooked by lessors and operators as they seek newer, larger narrowbody models to build their fleets.

No doubt, in recent years, the Boeing 737-700 has failed to move as quickly in- and out- of lessor fleets as its larger sibling the 737-800, but the model has definitely fared better than the A320 family, which has suffered from overproduction and therefore softer lease rates, say market sources.

"If you had to pick among the narrowbody aircraft currently out there, the top of my list for lease rate strength and ease of placement, would be the 737-800, then the 737-700, followed by the Airbus A320 with the last choice being the A319," says a lessor source, adding, "I think you would be hard-pressed to find any lessors that disagree with that in today's market."

In the last 12 months, Collateral Verifications' (CV) Gueric Dechavanne, vice president commercial aviation services, says he has seen 737-700 values drop by "about 5-10%", with lease rentals dropping by "about 10-15%" depending on the vintage.

"Not unlike the Airbus A319, the order book for this aircraft is diminishing and there is a lack of real demand from the market, therefore, it is tough to see any real recovery for this aircraft in the near future," he says.

As operators opt for larger narrowbody aircraft, Dechavanne expects 737-700 values and lease rate trends to "continue downward for the foreseeable future".

"As values continue to decline, we expect that some of these aircraft will be parted out as part-out firms look to take advantage of the commonality with the rest of the Next Generation fleet and strong demand for spares," he says.

IBA's senior analyst Alice Gondry agrees that "the high commonality of parts within the 737 Next Generation family make the older models attractive part-out candidates, with $10-12 million to be realised, adding "some ex-easyjet's aircraft have been subjected to that treatment."

Ascend says 737-700 market values fell by 2-5% at the start of the year, and still stand between $14.90 million for a 1997-built aircraft to around $33 million for a new delivery. Market lease rates also decreased at the start of the first quarter in the region of 2-3%, says Asced, except for on the older aircraft.

Larger aircraft preference

A big turn for the 737-700 came when Southwest Airlines, by far the most dominant operator of the type, ordered larger 737-800s and then "in the longer termembraced the 737 Max-8 and seemingly not the 737 Max-7," says Gondry.

Avitas' Martin O'Hanrahan, director of asset valuation, says: "There is some concern over concentration as Southwest Airlines has almost 35% of the in-service fleet, although any disposal from this source would, undoubtedly, be very gradual."

He adds: "The broad and diverse operator base for the 737-700 is a major positive factor moving forward."

CV values a 1998-vintage aircraft equipped with CFM56-7B22 engines and winglets at $13.86 million and lease rate of $150,000. IBA puts the same aircraft at a value of $14 million with a rental rate of $170,000, while Avitas believes the aircraft is worth $12.2 million with a lease rate ranging from $135-165,000 per month. Ascend opines the aircraft has a $170,000 a month lease rate, and a $15.73 million current market value.

Gondry notes the 737-700 still has appeal among operators, such as SAS, which will look to upsize its fleet of 737-500/-600s with the larger model.

O'Hanrahan says the 737-700 is starting to "show its age" and an increasing number of units are likely to become available as leases expire and fleets are replaced. "To a certain extent, aircraft in this size class are being displaced by larger types and financing still poses challenges for used aircraft in the current market," he says.

While the 737-700 is clearly a "strong contributor to the 737 Next Generation success in terms of fleet size, overall liquidity, operator base etc, there is no question that the market prefers investing into the larger 737-800," says Gondry.

According to O'Hanrahan, there is evidence that lease rentals have "weakened appreciably in recent months and this trend may continue."

A 2006-vintage 737-700 is valued at $22.32 million by CV with a lease rate of $205,000. IBA appraises the aircraft at $23 million with a rental rate of $215,000, but Avitas values the aircraft at $21 million with a lease rate range of $215-245,000. Ascend opines that a 2006-vintage aircraft has a $215,000 a month lease rate, and a $22.53 million current market value.

Newcomer impact

Dechavanne believes the introduction of the Boeing 737Max will most likely have an impact on the long-term residual values of the 737-700, but "this will not be realised until the latter part of this decade at the earliest, if not the first part of the next decade".

"There are still too many unknowns to fully understand how the next generation single-aisle products will impact the current generations of aircraft," he says.

With the CSeries also fast approaching entry into service and a potential re-engined Embraer family of jets, he anticipates that operators will "shift their focus on the more efficient aircraft should they require an aircraft of this size."

In the long term, he expects that the 737-700 will most likely suffer the same fate as its older sibling, the Boeing 737-500, which has become attractive in only select markets at the right price.

Avitas regards the installation of winglets as "standard" for the 737-700 fleet. For aircraft without winglets, a negative adjustment of $750,000 would be applied, says O'Hanrahan.

Dechavanne agrees that winglets, which are assumed to be installed in CV's market values, typically add about $750,000 to the value of the aircraft. "However, to get the real benefit of the winglets, the mission of the aircraft needs to be long enough, which is not necessarily the case with all operators," he says. "We feel that if the operator cannot use the aircraft on longer stage missions, they may not be willing to pay this additional premium for the added winglets in the secondary markets."

A new 737-700 aircraft is appraised at $38.9 million by Avitas with a monthly lease rate range of $275-305,000. CV believes the aircraft is valued at $33.79 million with a lease rate of $265,000. IBA values the aircraft at $35 million with a lease rate of $270,000 per month. Ascend opines that a 2012-vintage aircraft has a $290,000 a month lease rate and a $33.03 million current market value.