Lease rates and values are on the up, with the Boeing 767-300ER a particularly hot property and the MD-80 one to watch
Those that held on to aircraft during the dark years of 2001-3 can breathe a sigh of relief. Aircraft values are continuing to stage a recovery, based on strong traffic growth, vastly improved lease rates and a shortage of aircraft.
“Overall the industry is strong. You only have to look at the confidence in ordering,” says Jonathan McDonald at appraiser IBA, pointing to the record 2,140 firm orders posted by Airbus and Boeing last year.
Storage figures recovered strongly in 2004, and while 2005 figures from the Flight ACAS database (see page 56) suggest the rebound has tailed off, many of these aircraft are with US Chapter 11 airlines, where carriers are playing something of a cat-and-mouse game with the owners of the aircraft, seeing whether they will accept lower lease rates or take the hit from remarketing costs to move the aircraft elsewhere. As McDonald says: “We have dynamic storage rather than static storage. That is a good sign.”
There is one cloud on the otherwise sunny horizon. “In general, the market has recovered – the issue has been the situation in the US side as compared with the rest of the world,” notes Bryson Monteleone, managing director at appraiser Morten Beyer & Agnew. He adds, however: “What is paramount is that lease rates and values have strengthened.”
Values tend to lag lease rates when it comes to recovery, particularly as it can take time for information on trades to filter through to appraisers. As such, while lease rates are around double what they were at the trough of the 2002-3 downturn, in some cases the uplift in values has been much more muted. “Recovery in certain aircraft lease rates has been dramatic, but has not immediately been translated into values,” notes Doug Kelly, vice-president asset valuation and chief appraiser at Avitas.
A good example of this phenomenon is the Boeing 767-300ER – picked out by valuers as a particularly hot property at the moment. Gueric Dechavanne, manager valuation services at BACK Aviation Solutions, estimates that a 15-year-old 767-300ER will achieve lease rates of up to $500,000 a month, double the $250,000 that would have been fetched three years ago. “It is a fantastic phenomenon,” he says.
In terms of values, however, there has been a recovery, but it is much less impressive. Dechavanne estimates that a 1990-1 vintage 767-300ER will go for around $31-34 million, compared with the “mid-to-upper twenties” at the trough of the downturn. Bearing in mind the natural depreciation rate, this is clearly a healthy sign.
There is no sign of any let-up in the 767-300ER market – at least not yet. “Barring unforeseen events, the market should remain buoyant until the Boeing 787 comes along. The fact is that people need lift,” says McDonald.
Indeed, the prospect of the Airbus A350 and the 787 seems to have boosted the 767-300ER, as airlines and investors are waiting for the new types to appear rather than investing in aircraft that will soon be older generation.
This is one of the factors keeping a lid on 767-300ER values, as well as a general wariness about the longer-term outlook. “People are not necessarily going to pay a premium just because there is a leasing premium at the moment,” says Dechavanne, adding: “There are a lot of leased 767-300ERs out there, probably on five- to seven-year leases. It is not going to last forever.” Scott Daniels, vice-president asset management at BACK concurs: “The 787 will put pressure on this market – it is probably good for another three to five years.”
Others too point out that the 767-300ER’s reign will not last forever. “It’s gone from being one of the least liquid to the most liquid asset out there,” says Monteleone. “While there are buyers out there – people are happier leasing. In three to four years it will be illiquid again.” The aircraft could get a boost from the launch of Boeing’s freighter conversion programme for the 767-300, predicts Dechavanne, with the 767-300ER effectively taking the place of the older 767-300s. “It’s a nice kind of transition,” says Dechavanne.
And Kelly at Avitas also thinks Boeing’s production backlog may benefit the 767-300ER. “It’s going to continue. The 787 doesn’t come along until 2008, and Boeing is sold out until 2011.”
Driving demand
One of the factors keeping the 767-300ER market strong is the fact that there is also a scarcity issue with the Airbus A330. “There are virtually none available,” says BACK’s Daniels, adding that he disagrees with the view that the A350 will kill off the A330. “They are a little bit different,” he says, looking at factors such as range. IBA’s McDonald concurs: “The market is very tight. There are hardly any [A330s] available.”
Monteleone estimates that the newer A330 will achieve monthly lease rates of around the mid-$500,000 to $600,000. “They are generally being held on to by their current operators,“ he explains.
If there is an aircraft vulnerable to the A350 and 787, appraisers tend to point to the Airbus A340 family, particularly the A340-300. “In the longer run, the A350 will kill the A340-300,” says Daniels. Valuers predict that the four engines of the A340-300 will be too much of a cross to bear. “It is a no-brainer,” says Dechavanne. Appraisers point out that Airbus has made life difficult for the A340 by praising the virtues of the four engines over the two-engined Boeing 777, and then coming out with a two-engine replacement.
In contrast to the A340, the 777 has fared well recently. “The 777-200ER has been our favourite widebody,” says Kelly at Avitas. IBA’s McDonald cautions that the A340 should not be written off just yet. “It was not a good year in terms of sales, but I don’t think that’s a fair representation. Every aircraft has its ups and downs.” Airbus had 12 net orders for the A340 last year, compared with Boeing’s 154 sales figure for the 777.
Despite his concerns about the A340-300 market, Scott at BACK says the aircraft still has a “four-year window”. He adds: “For the time being, we aren’t rearranging our values, but we are keeping a close eye on it.”
Pointing to the plans of Airbus to offer cash-back deals on the A340-500/600, and to develop an “enhanced” derivative of the A340-600, Kelly at Avitas comments: “Airbus should see the A350 as the solution rather than derivatives of the A340 – it’s better than giving away money.” Of the four engines, he says: “It doesn’t make sense for most operators. I can’t see the point of building an enhanced derivative of the A340-600 at this time. Airbus have their hands full with the A380 and A350 programmes.”
Also causing appraisers some concerns are sections of the regional jet market, particularly the 50-seater. By far the largest market for regional jets is North America – which is also, of course, the most troubled industry region. Kelly points to Bombardier CRJ100/200s as being a weak market. “If you talk to Bombardier, they will tell you that 50-seater regional jets are leasing for $80,000-100,000 a month. We’re hearing $50,000 and the concern is the trend is that way,” he warns, noting that there are twice as many CRJ200s parked in early 2006 as there were a year ago.
Kelly states: “Bombardier has to focus on developing the secondary market. In the past, they didn’t have to develop a secondary market because the 50-seaters were all financed with 16.5-year leveraged leases. With the recent bankruptcies and demand shifting to the 70/90 seaters, the 50-seaters are leaving their primary operators earlier than expected.” He says that other markets will have to be sought out, including China, India and eastern Europe.
Monteleone sees some hope for the CRJ200, based on the fact that some are starting to see value in the product. “It’s had a horrible blow-out, but if you bought it on the cheap, you are probably making money out of it,” he says, putting a typical value at $8 million. He notes that start-ups in Europe, India and the Middle East have shown interest, along with those interested in corporate conversion.
Twinjet comeback
Some are also seeing value in the Boeing MD-80 family, another type that was badly hit during the downturn. “The MD-80 definitely took a hit, but it is gradually coming back,” says Monteleone. “It is a safe bet that the low pricing is going to attract interest. While it is a gas guzzler, engine overhaul costs are low – there are still some enticements.”
Kelly also sees fresh life in the MD-80 market. “It hasn’t done well over the last five to six years,” he notes, adding: “Fuel doesn’t help.” The MD-80s have a reputation for being fuel-thirsty, which has not helped their cause in an era of high fuel prices. “The engines are not as efficient as the CFM-powered Boeing 737s,” says Kelly. “But maintenance costs are cheaper than 737 Classics, and there is good value there – they can be had for $3-4 million. The 737 Classics are at least double that, and you are getting 150 seats in an MD-80, as opposed to 130 in a 737 Classic.”
Kelly says: “I’ve always been amazed that there is not more of a market for the MD-80,” putting this down in part to the fact that when the downturn hit there was an excess of 737s and A320s, combined with the fact that start-ups went for new equipment, meaning there was a lack of people sweeping up older types. “Now the tide is turning a little bit. New aircraft prices will start rising and if you can’t get new aircraft where do you go? The secondary market,” says Kelly.
There is a high concentration of MD-80s in the US market, Kelly admits. However, the type suffers from noise and emissions issues in Europe. Over 40% of the MD-80 fleet is operated by American and Delta Air Lines. In January American announced it was permanently grounding 27 of its MD-80s. Also contributing to the weak MD-80 market has been Alaska and Continental’s phase out of their MD-80s over the last couple of years.
Kelly notes. “If the US airline industry recovers, and the likes of American and Delta start to grow, what will they use? – MD-80s,” he predicts. “They are still a major part of the system. If these airlines can’t get new aircraft, which is likely, they may well turn to more MD-80s. They could pick up in value.”
The Fokker 100 is another aircraft that some see as providing value. Dechavanne says that there is good demand for Fokker 100s in good condition. Pointing to Fokker 100s that came out of the American and US Airways fleets, he says: “We’re hearing about $1-3 million for those, depending on the age and condition.” Former KLM Fokker 100s went for anything from $4.5-7 million he says. “It’s still a good aircraft, especially if you don’t have to put any money in,” he adds, alluding to the relatively high maintenance costs.
The 757 also continues to do reasonably well, especially the extended twin-engine operation versions, with a cargo-conversion programme finally expected to materialise this year. “Everyone thought that would materialise much quicker than it did,” notes Kelly.
There has been a strong recovery in values of 737 Classics over the past year and a half from the trough of the downcycle. Scott estimates that they lost around 30% of their values in the downturn. However, values now appear to be flatlining. “They have built their value back up – but not necessarily to where their hypothetical base value should be.” He estimates that a late 1980s Classic would typically trade around the $7 million mark or so, with lease values around the $130,000-140,000 rate at best. “It’s not a slam dunk. Investors are having to ask themselves, is it worth it?”
Some still see signs that the A320 market or at least some sections of it, are still slightly lagging the Next Generation 737 types. The A320 market took a bigger hit than the 737NGs in the downturn, as a high proportion of the major casualties (and the walking wounded) were operators of the type, including Sabena, Swissair, United Airlines and US Airways.
This led to a perception that the A320 was weaker than the 737NG, even if the reality was that their difference was often exaggerated. “There was a big difference between the older and newer A320s,” says Dechavanne. Even so, he says that this perception, combined with the more liberal A320 production rates during the downturn, is feeding through into lease rates. He estimates that A320s are in the “high-300” range, while 737NGs are leasing at around $350,000 per month.
Secondary markets
As a result, he says that while there is no difference between the 737NG base and current value, the A320 is still trading at a discount of a few percentage points. “It hasn’t got back to base value quite yet.” On an optimistic note, however, he adds: “It probably will by the end of the year.” This will please Airbus, as, no doubt, will predictions that the 737NG will soon develop a secondary market as the first wave starts to come off lease or airlines update their fleets.
The next big arrival will, of course, be the Airbus A380, and appraisers do have their concerns with this aircraft. “There is definitely a residual value issue. What is the secondary market going to look like?” asks Kelly. “The likes of Emirates, Lufthansa and Singapore Airlines have got it – but who are the secondary operators?” Stephen Jarvis, managing director of Avitas Europe, comments: “There is concern that one-third of the orders are with Emirates, and the market is split by two different engine types.”
Avitas puts a figure of $176 million on the A380, based on a single unit sale (with true market value at around 8% less). On the same basis, Avitas has a value of $101.3 million for the 787-900, $99.9 million for the 787-800, $109.7 million for the A350-900 and $99 million for the A350-800.
Of course, by the time the A350 and 787 come on to the market, we may be in the next downturn. But for now aircraft owners are, by and large, happy. ■
COLIN BAKER / EDINBURGH
COLIN BAKER / EDINBURGH
Source: Airline Business
