Residual value projections rarely assume that the status quo will be maintained over a 15-25 time horizon and as such market based forecasts will expect that current models will be upgraded and indeed, replaced.
Market based forecasts are constantly anticipating the timing and efficiency improvement of new aircraft types and improvements to existing models which contrasts with abstract base value projections that produce smooth future value curves but which do not seemingly account for supply and demand nor the timing and magnitude of new models. Residual values are regularly seeking to reflect market conditions in 15-20 years time and as such the factors that will be impacting the market in the 2030s will not be the same as those being experienced today.
Examining the market conditions of the late 1990s versus today clearly illustrates how the market can change. The fleet in 1999 comprised some 15,000 jet aircraft compared to the 29,000 of today – nearly doubling. In 1999 there still some 1,400 B727s in service versus the 200 today. The product line of Boeing had only just moved to the B737NG and the B737 Classic was still in production; the B777-200ER was the principal Boeing widebody and the demand for the B747-400 and B767 was still strong. For Airbus the A300, A310 and A340 were the principal Airbus widebodies with the A330-200 only having just entered service. Within the last ten years, the product lines of both Airbus and Boeing have undergone a seismic shift. Virtually all aircraft models have either been replaced or undergone a major upgrade in terms of size and or powerplant.
There has to be expectation that the market will see changes in the next 10-15 years. These will have a major effect on residual values, assuming that such movements in the product line have not already been taken into account. While the nature, timing and magnitude of future events may seem to be too vague as to impact residual forecasts,when Airbus starts to advertise for engineers to design a replacement for the A320neo, a stretched A321 and a re-engined A350, then it is all too apparent that there will be changes to the product line in the next 10-15 years while will adversely affect residual values.
Airbus has started to employ staff for future projects, some of which may be developed while others will not. A replacement for the A320neo is being contemplated. To some extent the existing A320neo was a rushed affair precipitated by higher fuel prices and a need to rein in development costs associated with the A380 even though Airbus realized that this was not ideal. Boeing needed to respond to the A320neo but was risk adverse due to the problems with the B787. Both manufacturers had been looking at an all new aircraft not least because it had become obvious that the average capacity of narrowbody aircraft was increasing as operators sought to add more seats rather than more aircraft therefore reducing seat mile costs. Neither the A320neo nor the B737MAX are right sized for the coming decade as evidenced by the enthusiasm for the A321 and the need for the B737-10 and B797. The engine manufacturers had concepts that could have been turned into all new engines but the airframe manufacturers remained focused on re-engining. This is now changing. Rolls-Royce opted to remove itself from this generational upgrade as it coped with the widebody market and instead seek to offer an all new engine. This new Rolls-Royce engine is set to enter service in 2025 and offers a marked improvement in efficiency over the existing PW1100 and LEAP. Safran is also working on an all new engine that is due to start ground testing in 2021 while Pratt & Whitney have plenty of scope to develop the GTF. These new engines are therefore not concepts but are a reality which will power new aircraft that Airbus and Boeing are contemplating.
Before the arrival of a replacement for the A320neo, Airbus are also recruiting engineers that will develop a longer range A321LR – an extra 700 nautical miles is sought – that would then allow the A321 to more ably cross the Atlantic and act as a direct replacement for the B757. Notably, engineers will also design a stretch to the A321 that will provide an interim solution to the B797 that will be launched this year. These developments represent major changes to the narrowbody lineup for Airbus and will therefore warrant changes to residual value calculations if not already included. Airbus is also actively investigating the possibility of increasing production to 100 A320neo aircraft per month among its four assembly facilities. This would allow for further economies of scale, thereby keeping down the price of new aircraft. Should the price of new aircraft fail to rise this would affect residual values. A high production rate also creates a need to maintain production in the longer term which can only be achieved by offering a new more efficient aircraft to replace the A320neo. The engine technology that offers another step change in efficiency already exists and the airframe manufacturers as well as the regulators, cannot ignore such a development. Both Airbus and Boeing will also be aware that they will need to compete against the Chinese C919 and by offering an all new product by the end of the next decade, the competition from the C919 will be effectively stifled – unless the C919 is re-engined. With inflation rates also likely to remain low, combined with higher production rates, market imperatives, changes to aircraft size and new models, the residual values of the existing A320neo as from 2025 need to be realistic. India has just released a plan that hopes to see 70 percent of commercial aircraft being assembled in India as of 2040 which is entirely possible as manufacturers seek to make politico-economic decisions and reduce costs.
Airbus is also recruiting for a re-engined A350. To a large extent, the A350 can be considered state of the art but it has already been in service for some four years or more and was designed more than a decade ago. Re-engining the aircraft in the mid to late 2020’s will therefore coincide with a reduction in production rates of the existing A350 and allow for the replacement of A330s and B777s. A re-engined A350 could also see a stretch to the existing -1000 model unless this occurs sooner. It is notable that while narrowbodies are getting larger, widebodies are contracting in size. There may be a case for either allowing Rolls-Royce to remain the sole engine vendor on the A350 or to bring a second source as a means of ensuring that any problems with the engine will not affect the entire market. This raises the question of whether the residual values of the A350 need to see some readjustment in the medium term after the initial delivery surge passes and as it becomes more apparent that a re-engined A350 may appear in the middle to late 2020’s.
The recruitment of engineers points to a serious intent but then so too did the additional focus on the re-engined A380 a decade ago. A replacement for the A320neo is needed in the latter part of the next decade and powerplants already exist. The engine manufacturers would not pour tens of millions into their development if there was not a clear requirement from Airbus and Boeing. The timing may change but there exists an inevitability of such developments.