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B777-300ER Residuals Come Under Spotlight

March 18, 2019

Ending of Production In Sight

Perversely, the cancellation of the A380 program has now renewed interest in the residual value prospects for the B777-300ER now that there are relatively few remaining to be delivered.

To a large extent the cancellation of the A380, which will see only some 260 units in service when production ends, cannot be compared to the B777-300ER which has secured more than three times that number. The B777-300ER has secured 844 orders of which 799 had been delivered as of the end of January 2019 leaving a backlog of 45 units. There are another 57 B777Fs on backlog and surprisingly a single B777-200LR. In terms of deliveries there were 32 -300ER deliveries in 2018. This compares with 65 during the course of 2017 and 88 in 2016. The decline in the delivery rate of the -300ER in the run up to the service entry of the B777X is all too apparent. The remaining 45 aircraft will likely take two years or more to be delivered, if indeed all are delivered.

The largest customers of the B777-300ER are Emirates with 120, Cathay Pacific with 49, Qatar 48, Air France 36, Turkish 30. These five customers have therefore ordered a third of all -300ER orders. The lessors have also been significant customers with GECAS having received 49, ILFC 28, ALC 21 and BOC 13. With the B777-300ER having been in service for over 15 years and given the predilection of the many carriers to rollover their fleets in favor of new aircraft after 10-12 years, there exists the expectation that more aircraft will enter the used market in the coming years. The 326 B777X aircraft on order will act as both replacement and growth capacity. With major operators already having older -300ERs in service and a desire to keep down the average age of the fleet, the -300ER will be released onto the used market. The Middle Eastern carriers are also facing some traffic growth issues as well as downward pressures on yields which makes it necessary to consider the orderbook. The latest Airbus orderbook reflects the sizeable cancelation of A350 Etihad orders. Other carriers around the world are also experiencing some difficulty in filling aircraft with the right mix of passengers.

The B777-300ER has proven popular as evidenced by the number of orders but whether it will garner the same degree of enthusiasm on the used market is now being put to the test. There will be some operators who will of course continue to operate the aircraft until scrapping takes place after 20-25 years. There are notable B747-400 operators who have retained the aircraft well beyond the point at which the majority of original customers have disposed of their fleets but this will be a minority. Most operators will be anxious to ensure that they continue to operate the most efficient of aircraft in the form of the A350, B787 and B777X not least because flying long haul uses much more jet fuel when expressed as a percentage of direct operating costs than a short haul operation. A large number of -300ERs have also been financed via sale and leasebacks with major lessors and financial institutions. The leases may be extended but only at much lower rates. The end of lease compensation payments associated with maintenance may also facilitate the premature scrapping of the aircraft. The discounts that the customers for the B777-300ER can secure for multiple orders cannot be ignored when seeking to buy replacements, particularly when aircraft are then financed based on single unit values, which has resulted in a book profit of $20-30 million per aircraft.

Remarketing used large widebodies is not as easy as an A320 or B737-800. There are relatively few operators capable of supporting the type and those that are have a preference for buying new. The experience of other large widebodies cannot be ignored. The B747-400 was also held in high esteem when production was at its height in the 1990s not least because it had a monopoly. The fall in B747-400 values was significant and sustained in the years following the ending of production; the values of the smaller B777-200ER have tumbled over the last decade to single digits; and trying to dispose of the B777-300 or B777- 200LR is an uphill struggle. There is an argument that operators will seek to upsize from the B777-200ER for example and some will do so. There has been clear evidence over the last few years – note the A380 and the lack of new orders for the B777X – that the preference has been for smaller widebodies such as the A350 and B787 where the carriage of marginal economy passengers is less onerous. Services to second cities can be more profitable as the business class passengers favor convenience and frequency from a more local airport. The cost of reconfiguring the B777-300ER will likely be in excess of $4 million and may even more in excess of $8 million. Many of the older -300ERs will feature previous generation IFE. The downtime associated with reconfiguration will also be a concern given the ever present bottleneck in the supply of interiors.

The values of new -300ERs have also fallen by a significant amount in the last few years as production comes to a close. The value of a new -300ER at its peak approximated $170 million but today $150 million is more likely which does not even take into account the effect of inflation over the last five years. With declining values for new aircraft the values of used aircraft are falling that much faster than the average eight to ten percent per annum. There are already over 100 -300ERs which are 12 years of age or older and within another three years this will increase to 250. A freighter conversion program may be progressing but any meaningful number of conversions will not be evident until perhaps 2025. Most residual value forecasts will be taking such negative prospects into account although the assumptions underlying base values may not adequately compensate for the peculiar behavior of the larger widebodies when they come to market.

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