Analysts estimate that, since 11 September, current market values of new and used aircraft have fallen an average of 15%. Banks are highly sensitive about taking on asset risk in the current market climate and are maintaining a watchful eye on aircraft values, keeping in mind how a drop in values will affect the aircraft already in their portfolios. Rating agencies are also monitoring falling values, as they affect the status of Enhanced Equipment Trust Certificates (EETCs), which are secured against a portfolio of aircraft.

Richard Bittenbender, senior credit officer for airlines and EETC analyst at Moody's Investors Service, warns: "The availability of a large number of used aircraft for sale or lease at very reasonable values will certainly hold down the value of other used aircraft, and, to a certain extent, new aircraft. Also, substantial capacity at major manufacturers, will lead to a constraint [or] discounts on orders."

Moody's has put many EETCs on credit watch, with concerns over the underlying collateral value of the aircraft and falling values on some of the aircraft in the portfolios. The agency says it has downgraded EETC's based on carriers' corporate credit rating, so that if ratings was go down, so does the EETC.

Bittenbender points out: "Today there is no market for aircraft. There are essentially lots of offers and no bids, to put it in financial terms."

Aircraft appraisers have witnessed a dramatic recent drop in aircraft values for both used and new aircraft. Older widebodies, such as the Boeing 747, had already seen a drop in value over the past few years, with airlines moving to smaller capacity aircraft such as Boeing 777s, and Airbus A330s and A340s.

But Eddy Pieniazek, director consultancy services at Airclaims, points out that these trends already existed prior to 11 September. Particularly for Boeing 737s, there are next generation replacements available at reduced prices that make it more attractive to buy the newer model.

He says some of the aircraft that were expected to be retired in the near future, such as the Boeing 737-200s, 727s and McDonnell Douglas DC-9s, have seen an acceleration in their retirement schedules.

Additionally, operating lessors are being flexible on lease rates, on the basis that it is better to have the aircraft flying than to take them back early. This in turn has affected values.

Clifford Brown of European aircraft appraiser MBA says the excess of available aircraft in the markets "is affecting the ability to raise money to buy aircraft or lease aircraft." Lease rates have dropped 30% since 11 September for 737-300s and around the same for the A320-200s, he adds.

Appraisers warn that aircraft values are expected to remain volatile over the next year, with recovery to pre-11 September values expected no earlier than summer 2003 or early 2004.

Source: Flight International