By the close of 2016 we will have seen over 360 new twin-aisle passenger jets delivered to airlines, a record number, continuing the renewal of the long-haul and higher-capacity fleet. However, this is leading to increasing remarketing challenges for some of the types being replaced and a consequent negative effect on Values and Lease Rates. This article focusses specifically on the A330 and 777-200ER.
In light of growing availability and storage of A330s, in November Flight Ascend Consultancy made a downward adjustment to Current Market Values for the A330-200 and -300HGW. Both had previously experienced stable values since the beginning of the year, but numerous reductions in Lease Rates since the start of the year, including a 3-10% reduction in October, are reflective of growing supply and lower demand. The market has been witnessing lessors having to go to new lows to get aircraft placed.
The A330-200 is seeing a rapid increase in lease returns and parking of aircraft, so that the parked fleet now stands at over 50 aircraft, of which we are aware of only eight having new operators lined up. Emirates has been continuously parking its fleet and returning aircraft, others have come from the fleets of LATAM, Avianca Brazil, Eva and Qatar among others. Turkish Airlines has been adding aircraft, including ones formerly with LATAM (Brazil), but in November it parked 12 A330-200s as it cut back its route network in the face of a challenging 2016. It remains to be seen how temporary this action is. The parked total is now almost 10% of the A330-200 fleet, which is a very high level for a commercial production twin-aisle aircraft.
Some aircraft are moving – Air Berlin and SunExpress Germany are each adding two, while Aerolineas Argentinas, VIM and Wamos Air will take one each. Leases this year have included aircraft going to Shaheen Air in Pakistan, TAP, Air Transat, Azores and Onurair. In fact the A330 combined operator base stands at roughly 100 airlines – approximately double that of the 777.
However this growing operator base has come at a price. A330-200 Market Values were reduced by between 3% and 8%, with the oldest vintages seeing the greatest percentage reduction. Lower Lease Rates (which have continued to drop since the start of the year) are also a symptom of lower revenue earning potential of an aircraft type where roughly half the fleet is owned by lessors. Values now range from $23 million to $77 million in half-life or better condition for our basic specification.
The parked aircraft include those managed by at least seven lessors, with others available through brokers and Airbus. There were also a number of further lease expiries by year end. This highlights the magnitude of the challenge that lessors face, and is reflected in the most recent leases being negotiated and signed.
The A330-300 situation is better in that the parked fleet is more focussed on 15 low-weight -300s (pre-1999 vintage) which realistically are going for part-out. Another is the prototype P2F freighter conversion at EFW in Germany, the first of four for DHL. The eight reasonably new -300HGWs which are parked are all destined for Turkish, most being ex-Skymark machines with Intrepid and due to be leased in early 2017. Considering that the same airline just parked 12 -200s, it remains to be seen if these plans are changed.
A330-300HGW values were reduced by between 2% and 6% in November, once again with the oldest vintages dropping the most. At the newer end, value changes are informed by recent new aircraft pricing observed, while at the older end, despite a lack of meaningful sales transactions, the reduction is reflective of the fixed premium over its -200 sibling, which cannot grow in the current market environment. Values now range from $29 million to $91 million in half-life or better condition, for our basic specification.
Another type under scrutiny is the 777-200ER, where the parked fleet is now some 9% of a 400-strong fleet. Market Values and Lease Rates were last reduced in Q2, by around 5% and 18-20% respectively. In the midyear update, current Base Values were reduced by 6-11% depending on the vintage. The impairment is reflective of a permanent hit to 777 values caused by the latest spike in availability which the type will not recover from in the long term.
There are currently 33 -200ERs which are parked and unplaced, most coming from Singapore Airlines (12), Malaysia Airlines (nine) and Emirates (five).
There has been some limited activity, with VIM in Russia adding four ex-Malaysia and -Singapore -200ERs this year and due to take two of five parked ex-Transaero machines. Omni in the US added two ex-Kenya aircraft for charters and Alitalia is also leasing an ex-Vietnam machine.
Of the parked fleet, 28 have Rolls-Royce Trent 800 engines and it is interesting to note that demand for the engine is actually stabilising as a number of new operators are opting not to enrol in TotalCare agreements but rather go with time-and-material engine maintenance, which improves demand for spare engines and supports the value of "green-time", protected by a high overhaul cost. We believe this is an encouraging sign for Trent 800 values longer term.
The type is now entering its retirement cycle, albeit in low numbers at present; the freight conversion programme is looking unlikely to be launched and the replacement options are increasing. Five -200ERs have been parted out this year, all 18-19 years old, three with Trent engines and two with Pratt & Whitney PW4090s.
Both the A330-200 and 777-200ER are facing remarketing challenges.
The operator base of the A330-200 has grown by four in the past year and the near 500-strong fleet is now spread among 76 operators in 56 countries, a good spread which helps liquidity. By contrast, the larger 777-200ER has a more concentrated base, around half that number. Half of the fleet is with just five of the 34 operators. Over the past five years, the operator base has stayed fairly static.
Having said that, it is still a key type for American, United, Air France/KLM, while IAG/British Airways has committed to life-extension programmes on the 777-200ER fleet, taking them out to 30 years of service. It will convert to 10 abreast economy seating for a Gatwick-based fleet of 25 used on mainly leisure routes from 2018. The fifth largest user, Saudia, will however retire its fleet of 23 through 2017, replaced by new A330-300s. This should increase availability of General Electric-powered examples and we expect a number of them to be parted out.
In summary, we are seeing supply increasing for both used and new aircraft and this is a key period for fleet rollovers of types like the A330 and 777-200ER. They are in a market where activity is focussing on weaker credits, lower rentals and strong lessor competition, both against each other and against airlines looking to sell or sub-lease unwanted capacity.
Source: Cirium Dashboard