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Historical Lease Rentals of B737-500 Show Volatility

June 11, 2018

There continues to be a considerable difference in the behavior of lease rentals and values with the former exhibiting greater volatility in the short term and showing more aptitude for recovery than values.

The experience of the B737-500 demonstrates how the market for the type has changed over time, not only due to the ending of production and replacement, but also as a consequence of the change in the product line.

The fortunes of the B737-500 seemed assured when launched in view of the direct replacement of the B737-200/ADVs that were in service. But market demand changes over time and direct replacements rarely achieve the envisaged success. Initially the 1995 built B737-500 seemed to show promise but this was largely because of the recovery of the market from the downturn of the early 1990s. The U.S. market in the mid to late 1990s was improving not least because of new noise rules which saw Stage 3 hushkits being needed for the DC9, B727 and B737-200 fleets. The combination of higher fuel costs and environmental issues saw a more rapid move towards the B737-300/-400/-500. The market for the B737-500 was particularly attractive in the later 1990s due to this like for like replacement. As the events of 2001 took their toll both values and lease rentals suffered. While values kept on falling, the lease rentals enjoyed a measure of stability 12-15 years ago as the older types were increasing withdrawn from service. The arrival of the A318 and B737-600 were not real substitutes as both types featured higher weights which increased airport and navigation charges. The mainline operators were less enthusiastic as they sought to improve their expenses by utilizing expensive flight crews on larger aircraft. Similarly, the regional operators found the aircraft too large and in any event restrictive scope clauses made it difficult to acquire additional aircraft. For a time, the B737-500 saw considerable demand in Eastern Europe and Russia and this contributed to the stability in lease rentals. Inevitably, the last decade has continued to see a change in the market structure that has seen lesser demand for aircraft of this capacity and as such lease rentals and values are at a levels that makes further falls seem unlikely.

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