Values & Rentals Continue to Decline

February 25, 2013

The exceptional grounding of the B787 has provided some respite for the B767 but not much. Some operators may now be loath to dispose of their B767s until not only the return to service of the B787 but also proven reliability.

With production stretching back for more than 22 years and being a contemporary of the A320, the type should have lost its edge in terms of performance and capability that much earlier. However, the lack of alternative products and the need to plan for the arrival of the A350 and B787 made it necessary for operators to seek short to medium term capacity, generating a shortage and forcing values and lease rentals ever higher before now experiencing a fall. Over the last decade, the B767-300ER has enjoyed considerable success both among operators and the financial community. The success has been justified and warranted. Even before the B777 was being designed, the B767-300ER was setting the pace for medium sized widebodies.

B767-300ER Vital Statistics
LAUNCH 01/1985 STANDARD MTOW 387,000lbs LIST PRICE (2012) $182.8m
SERVICE ENTRY 12/1987 FUEL CAPACITY 24,140usg VALUE Y1988 $8.0m
ORDERS 583 FUEL – OPTIONAL 24,140usg VALUE Y2001 $29.0m
BACKLOG 10 RANGE- MAX FUEL 5,985nm 2015 F/V – Y1988 $9.6m
OPERATORS 81 CARGO 5,190ft3 2015 F/V – Y2001 $23.0m
ENGINE TYPES CF6/PW4/RB211 PAYLOAD 45,780lbs LEASE RATE – DoM1988 $170,000 per month
D CHECK COST $2.6m MLW-STD 295,000lbs 2015 LEASE RATE –DoM1988 $135,000 per month

To a large extent Boeing was fortunate. The B767-300ER was developed as the international market started to enjoy the benefits of fragmentation. The relaxation of bilaterals, which still govern much of international air travel, allowed operators to fly from airports other than the major gateways of New York, London, Paris, Singapore, Tokyo, Sydney or permitted greater frequency.

The ability to fly direct, and more frequently, precluded the use of the then ubiquitous B747 or even DC10. The increased competition among international operators, albeit then still limited compared to domestic markets, also resulted in a demand for more efficient widebodies. The advances in engine technology, specifically reliability, facilitated the use of twin engined widebodies over longer distances, displacing the DC10 and L1011 trijets. The range of the A300-600R was too limited allowing the B767-300ER to become the aircraft of choice for international carriers seeking to exploit new market opportunities. The very performance characteristics of the B767-300ER also allowed operators to seek out new routes and press for further relaxation of bilateral agreements to suit the capabilities of the aircraft. The performance advantages of the B767-300ER ensured that demand originated from both scheduled and charter carriers.

The enthusiasm for the type also coincided with a change in funding methods. In the late 1980s, the larger operators had begun to appreciate the advantages of the operating lease. The potential profit in residual values combined with the good credit rating of many carriers persuaded a number of financial institutions to participate in the funding of the B767-300ER despite its much higher unit cost and more limited remarketing potential. The spreading operator base of the late 1980s and early 1990s seemingly presented ample remarketing opportunities. As with some other types, the initial enthusiasm for the operating lease encouraged ever more financial institutions to participate. Major lessors sell aircraft already on lease to other financial institutions in order to finance the acquisition of more aircraft.

The expansion of the ownership base eventually led to a number of lease expirations occurring at the same time, a problem exacerbated by weaker economic conditions and a changing market structure. Popularity in the short term can prove to be a weakness in the medium to long term. Too many lessors needed to place too many aircraft at approximately the same time such that availability became an issue and competition prompted a fall in value and rentals. Both the B757 and B767-300ER are examples of where diverse ownership can itself be the cause of weaker values and rentals. Combined with this issue, the extension of the product life cycle beyond ten years encouraged operators to replace older -300ERs on a one for one basis, leading to an increase in availability of older examples.

The market conditions that allowed the B767-300ER to gain superiority had already begun to fade before September 11th 2001. Airbus, finally appreciating the need to combine long range capability with twin engined economics, introduced the larger and longer range A330-200. The market structure, particularly code-sharing, is favoring a slightly larger aircraft, particularly those that are able to offer greater interior flexibility and family commonality. Larger aircraft also provide for lower units costs. The A330-200 met this criteria while the larger B767-400ER remained essentially isolated despite compatibility with so many B777 items.

The excess of A330-200s in 2002-2003 dissipated at the expense of the B767-300ER. Even before September 11th the benefits of switching from the B767-300ER to the larger A330-200 were already becoming apparent. Temporary lower lease rentals for the A330-200 encouraged existing B767-300ER operators to switch despite the larger size. The displacement of the B767-300ER has however been temporarily halted in the last three years due to the delay in the service entry of the B787 though orders for the A330-200 have far outweighed those for the -300ER.

The improvement in the international climate as from 2003 onwards saw increased demand for the -300ER though this initially benefited lease rentals before values. The lack of delivery slots for the B787 forced operators to move retain equipment for longer than anticipated. At the same time, the regeneration of the international market and the preference for smaller rather than larger equipment allowed values and lease rates of the B767-300ER to rebound. The weakness of the market then caused operators to reconsider their fleet plans and unfortunately in such a downturn, the B767-300ER did not fare well. The delay to the service entry of the B787 has allowed the B767-300ER to not only remain in service for longer than anticipated but also for further orders to be placed as a means of securing interim lift without changing aircraft type. The longer the production persists the greater the potential for value convergence to emerge. n

Aircraft Asset Assessment: The B767-300ER

Market Presence. The B767-300ER presented the operating leasing community with the ideal tool with which to enter the widebody operating lease arena. Throughout the 1990s and then again in the last decade, the B767-300ER enjoyed considerable success but then fell victim to the usual problem of lengthy production and market saturation. Past success was achieved through the emergence of a new market structure and the absence of any real competition from Airbus until the arrival of the A330-200 in 1998. The B767-300ER operator base remains extensive and distributed among all regions of the world. Both scheduled and charter operators favor the type as do large and small operators. The competition from the A330-200 has however, been notable. Operators have sought to retain equipment as a stop gap measure until the arrival of the B787.

Market Outlook. Destined the retention of good fortune, the outlook for the B767-300ER is far from promising. The lesser fortunes of the type in terms of values were exacerbated by the recession but operators did not hand back aircraft lessors. The Aircraft Rating, which seeks to reconcile current popularity as an asset with longer term residual value potential, has declined from the B++ accorded in 2000 to B—in 2003 to the current D+. The prior and existing decline in popularity as an asset was a reflection of a number of factors. The A330-200 remains a competitor and replacement. The product life cycle of the B767-300ER is coming to a close as evidenced by the limited backlog even if a few swansong orders have been placed of late. The cessation of production is inevitable in view of the maturity of the market segment and the arrival of the B787 in numbers. There continues to be considerable concern over the future of the B767-300ER as it faces the challenge of a similar capacity B787.

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