Aircraft values are affected by a multitude of sometimes disparate factors but the fall in production rates, a hiatus in order placements and the contraction of the backlog represent key turning points for values and usually signal forthcoming weakness.
A clear relationship between GDP, RPK (traffic) 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. In the assessment of both current and future values, variables comprise GDP, RPK, ASK (capacity), fuel, inflation, interest rates, yields, load factors while type specific variables can include orders, operators, 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, aircraft age, total hours and cycles, registration, specification, lease rentals, number of lessors and retirement profile.
The way these variables interact with one another – and the inclusion and exclusion of factors over time – is constantly changing but the extent of the backlog, the rate of new order placements, and the level of production offer consistent insights into how values will likely change in the coming years. The backlog is constantly changing. When the number of outstanding orders falls to less than 15 percent of the orderbook for a mature product – a type that has been in production for at least seven years – then there is an expectation that values will experience a fall. When production rates are less than 50 percent of their peak then values can be expected to be declining by more than the average annual trend of eight percent. As the order intake falls to less than 20 percent of production over two years or more then this will also be an indicator of a need to introduce an accelerated rate of decline in values. The combination of two of the three above factors – the backlog falling to 15 percent or less, production rates at 50 percent of their peak, the intake being less than 20 percent of production – should prompt a change in direction for values or an increase in the rate of decline.
The values of the A319 have been suffering from a sustained decline for a number of years as the market has increasingly moved to larger aircraft. This was evident even in 2010 as the backlog had fallen from 328 units or 20 percent of the order total in 2009 to only 230 aircraft – 15 percent. Also in 2010 the net order intake for the A319 was -47 with 2011 also recording -2. In 2009 the production rate for the A319 numbered 88 units but in 2010 this had fallen to 51 and in 2011 to 47. The peak year of production was 2005 when 142 were produced. The backlog was therefore dwindling such that by 2012 the backlog amounted to only ten percent of the orderbook. Values of the A319 had fallen by only some five percent between 2010 and 2011 but between 2011 and 2013 the decline was 20 percent. In the seven years since 2010 values have declined by 50 percent. For some years the values portrayed by appraisers for the B777-200ER remained higher than was perhaps warranted but the waning backlog and the falling production rate showed a marked lack of attraction such that values have more recently been radically adjusted downwards. In 2007 for example, there were 19 deliveries of the -200ER but in 2008 this had fallen to only three.
There are now only 71 B777-300ERs remaining to be delivered which compared to an orderbook of 829 represents less than 10 percent. Values of the -300ER have been experiencing a decline for the last two years partly based on the limited number of new orders and the declining backlog. With 56 -300ERs delivered in the first nine months of 2017 the backlog will be all but satisfied in less than a year. For the A380 there have been only nine deliveries in the first nine months of the year compared to 28 in 2016. The backlog may still be nearly a 100 or 30 percent of the orderbook but with net orders totaling zero over the last two years, the combination of limited order intake and falling production rates points to value weakness.
The sophistication of the modelling involved in the calculation of the future values has progressed significantly since forecasts were initially made in the early 1980s. The appraisal community was initially dominated by engineering orientated individuals, emanating from the focus on physical inspections. The needs of the financial community were also simpler 30 years ago with a requirement for straight line depreciation rather than seeking to reflect actual market trends. By the late 1980s, the introduction of more accessible modelling techniques through the use of personal computers and more complex financial arrangements, started to increase the sophistication of future value modelling techniques. Appraisers have become increasingly drawn from non-engineering backgrounds though there is a danger that a lack of familiarity with the aviation industry can prevent a wider understanding of industry dynamics.