First Generation Stage 3 Models Benefit from Rising Rentals

July 12, 2004

The continued improvement in new 100-150 seat rentals, coupled with the absence of availability, has stimulated lease rates for first generation Stage 3 narrowbodies.

There has been a steady rise in rentals of quality B737-300 and B737-400s over the last 12 months. Compared to lows of around $100,000 in late 2002, lessors are now able to command $140,000 for the same equipment today. In achieving higher rentals, lessors may have had to agree to shorter terms with less financially secure lessees. The sustained weakness of the dollar has also allowed non-North American lessees to be more flexible in agreeing to higher lease rates.

The market improvement has enabled some major carriers to rollover older types in favor of newer equipment already on order. However, given the fragility of many airlines’ finances, major operators capable of taking such action are few. The earliest delivery slots for new aircraft now extends to the end of 2005. With nonexistent new availability and a very tight used market, operators seeking early expansion or startup have few alternatives but to opt for used equipment. In a fast-moving market that requires few financial or regulatory barriers to service entry, waiting for the right equipment is no longer an option.

The availability of B737-300s and -400s has not fallen to the same extent as the B737-700 or A319 due to the existence of so many examples in a less than desirable condition or specification. Quality equipment, however, is being snapped up so quickly that it barely enters availability listings. Where lessors previously had to expend considerable energy on seeking a single lessee, now a number of lessees are likely to be competing for the same B737-300.

The first generation Stage 3 narrowbodies are inevitably less fuel-efficient than their modern counterparts. With typical sector lengths of one hour, the fuel component of direct operating costs is sufficiently low to not make it a deal breaker. Rentals for the first generation Stage 3 models may see another 10 percent improvement through the end of 2005, with lessors able to secure longer terms. Such an upward trend is likely to be short-lived.

Historically, an upswing in the market results in manufacturers’ inability to meet short-term demand. The absence of available new equipment inevitably forces the market to seek older equipment. In the 1980s, the B727 was returned to service with a vengeance; in the mid 1990s, the DC9-30 experienced a fleeting revival. This demand for older models, as usual, is by default rather by design. If newer equipment were to be available, then operators would acquire these aircraft. Manufacturers today are more capable of ramping up production, and production lead times now equal about six months rather than 18. Both Airbus and Boeing [BA] also have ambitious and costly new models under development. Producing as many new aircraft as possible will take on greater importance as each manufacturer seeks to generate cash.

With the increased production rates and the ability of major operators to rollover fleets, there is the prospect, once again, of greater availability of first generation Stage 3 equipment, as of late 2006. While the B727 enjoyed something of a double revival in the late 1980s and to a lesser extent in the mid 1990s, due to a far greater number of A320 and B737NG family members being produced, the current resurgence of interest in first generation Stage 3 equipment may be the only such period of renewed interest.

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