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A350-1000 Orderbook Reduction Yet to Impact Values

October 2, 2017

United & Cathay Switch Orders to -900

The high-profile switch of orders from the A350-1000 to the smaller -900 by two primary customers represents a cause for concern with regard to values of the former if no new orders are forthcoming and if other customers undertake similar changes.

United Airlines has changed an order for 35 A350-1000s to 45 A350-900s. The -900s will be used to replace B777-200ERs and will now not be delivered until 2022-2027. Cathay Pacific has converted six of its 26 -1000s orders to the -900. The delivery of its -1000s is also being deferred. Before these changes the orderbook for the -1000 amounted to 211 aircraft from 12 disclosed customers plus one single order from an undisclosed customer. The changes now see this orderbook reduced to 171 units representing a near 20 percent fall in the space of a few weeks. The largest customers are now Qatar with orders for 37 aircraft and Etihad for 22 units. Iran also has 16 orders and Air Lease Corporation nine. The Middle Eastern carriers are facing some issues with regard to sustaining traffic growth at previous rates.

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The change in the orderbook is far from welcome given the status of the program. The Rolls-Royce Trent XWB-97 was certificated in early September 2017 and service entry of the A350-1000 is due to take place in a matter of a few months if not weeks. While the narrowbody market continues to enjoy considerable strength, despite the demise of Air Berlin, the widebody market is continuing to face some pressures particularly in the context of remarketing larger used examples and in terms of new order placements. The first nine months of 2017 saw only a single A350-1000 aircraft from an undisclosed customer being ordered. During 2016 Virgin placed an order for eight -1000s and Iran Air 16. The orderbook for the B777X has also been slow to build more recently with 326 orders to date. The only order for the B777X since the end of 2015 was 20 from an unknown customer in June 2017. Coupled with the little change in the orderbook for the both B747-8 and the A380, then the market for the larger widebodies appears to be experiencing problems. This may be due to the long lead times that any new order now involves, perhaps more than three years.

The used market for the larger widebodies also seems to be odds with the strong demand for narrowbodies of nearly all shapes and sizes. Values of used A380s are falling as those coming off lease have yet to be placed; the leadup to the service entry of the B777-9 is resulting in a material fall in the values of the B777-300ER and the marketability of the B747-8 is questionable. There is also no hiding place for the once ubiquitous B747-400.

Yet the demand for the medium sized widebodies such as the A350-900 and B787-9 remains strong with new orders and switches taking place. This suggests that operators are moving away from a First Class product to the Business, Premium Economy, Economy product and are focusing on ensuring high load factors and maintaining yields. Ordering the very largest aircraft only to see a need to fill more economy class seats is not the way modern airlines work. The issues associated with congestion and traffic growth do affect the number of seats but not, as yet, to the extent of always ordering the largest. Airbus has consistently maintained that there is no need to increase the capacity of the A350-1000 to match that of the B777-9. The paucity of new orders for the largest widebodies would seem to support this argument though Airbus may yet develop the A350-2000 just to offer a direct competitor to the Boeing product.

For an aircraft that has similar capacity to the existing B777-300ER, the values of the A350-1000 should attract a premium. But according to AVAC the $166 million for a new 2017 A350-1000 is still below the peak that values for a new B777-300ER achieved. Even at $184 million for a new B777-9 to be delivered in 2019, this will still be less than if the value of a new B777-300ER had continued to increase by some 2 percent per annum from its 2014 peak of $169 million. The drop of 20 percent in the A350-1000 orderbook will continue to ensure that there is no excuse for increasing the values of the type and indeed will warrant close scrutiny in terms of residual values. For those financings based on a 12-year term then a A350-1000 built in 2019 is expected to be worth 34 percent of its original value (inflated) as of 2031 versus 38 percent for the B777-9. Even with a 20 percent fall in the orderbook for the A350-1000 these values remain valid but another similar fall may require a reassessment of both current and residual values.

There have been few, if any, large widebodies that have exhibited strong residuals over the long term. The B747, now the B777-200ER and to a lesser extent the -300ER, the A380, the A340-500/-600 have all seen values tumble in the years following service entry. The problem for the larger widebodies lies in the limited number of operators capable of supporting the aircraft and the preference of those airlines for new, not old, equipment.

 

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