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Stability (Mostly) for Values & Rentals as Indicators Remain Positive

April 16, 2018

Replacement Models Continue to Erode Values of Outgoing Models

The trend for commercial jet aircraft values and lease rentals generally remains positive as the Northern Hemisphere moves towards the peak season although not all types are managing to avoid a significant decline.

The factors that can impact values encompass GDP, RPK (traffic growth), ASK (capacity growth), fuel, inflation, interest, yields, load factors, airline profits, orders, operators, number in-service, backlog, geographical distribution, operator concentration, product life cycle, storage, level of availability, replacement proximity, replacement productivity, production rates, engine type, ETOPs, environmental compliance, MTOW, lease rentals, number of lessors and retirement profile. A clear relationship between GDP, RPK and values exists although this is not a constant. When there is strong economic growth, traffic starts to rise. Operators experience an increase in load factors, and then higher yields. The higher fares and limited availability of seats then prompts both existing and new airlines to introduce more capacity. The manufacturers need time to gear up production to meet the demand and a shortage can appear. This shortage may not necessarily see operators moving to older equipment. As the shortage increases and the imbalance between supply and demand intensifies, values tend to rise. There is however a lag between changes in traffic, rises in lease rentals and increases in values. Traffic will rise first, then lease rentals and then values. With a downturn, values may fall before lease rentals.

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Today, interest and inflation rates are extremely low as is availability; traffic growth in high; availability of funding is strong; the backlog is long; the depth and breadth of the operator base is extensive. The market structure has also changed such that the depth and breadth of the operator base, at least for narrowbodies, is that much more extensive. This allows for the collapse of such airlines as Monarch and AirBerlin to be absorbed more easily. Conversely, oil prices are relatively high, yields can be variable, the product line is changing and political events can trigger changes in traffic patterns. Overall however, the market is in positive territory, and has been for some time. This has ensured that the transition of the product line virtually en-masse, has been less traumatic than might have otherwise been the case, especially for the narrowbodies. The values of the A320ceo and B737-800 have thus remained very stable over the last twelve months and lease rentals have suffered due to ever more competition. A decade ago there were less than ten financial institutions willing to invest in aircraft; today everyone is seeking to participate not least because of the proven track record of the sector over the last few years – usually the worst time to invest. The widebody sector is not faring so well as values for such aircraft as the B777, A380, B747 and A340 experience substantive falls, significantly greater than eight percent over the last year.

Prospectus for EETC transactions usually state that values fall by an average of three percent per annum. In reality, the trend is more likely to average eight percent per annum though the aircraft type and the state of the market can influence the downward trend to a greater or lesser extent. The current strength of the market suggests that the more popular aircraft are enjoying a decline of approximately four to six percent over the last twelve months while the less popular will be suffering from at least a double digit decay over the same timeframe.

While on average the value of the A320 has fallen by 10 percent per annum over the last 20 years, the fluctuation can be considerable ranging from no fall to a decline of more than 20 percent. For widebodies, the average annual fall in value has been higher over the last 20 years. The degree to which aircraft values change during a downturn varies considerably. Different aircraft types will react to a downturn – or Black Swan event – in different ways. An aircraft that is no longer in production will likely suffer more than an aircraft that is still in production. During a downturn, new aircraft act as replacement rather than growth capacity. Lessors will seek to place new aircraft at a discounted lease rate for a short term to generate at least some income and then when the market improves, re-lease at a higher rate. In the meantime, the older aircraft will likely be retired. The effect of 2001 was to see the values of a 1997 built A320 fall by 16 percent in a single year. Yet, in the year 2008, values of the same aircraft fell by 12 percent and in the following year by a further 18 percent. By 2008 the A320 had already been in production in for some 20 years and was no longer in the first flush of youth. Yet for the MD81 the effect of 2001 was to see a 26 percent year on year fall and in 2008 a 36 percent fall was recorded. Widebodies are also likely to fare worse during a downturn as the number of operators capable of absorbing the increase in supply of used units is limited. In 2009, the values of one of the first B777-200s to be produced fell by more than 30 percent in a single year when in 2001 the fall was only 15 percent. The prevailing interest and inflation rates at the downturn will also be an influence. In the aftermath of the financial crisis, both interest and inflation rates fell significantly thereby making newer aircraft that much cheaper and accelerating the decline in values of used types – as indeed the higher price of fuel.

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