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A320ceo Values Remain Stable Due to MAX

January 20, 2020

The problems facing the MAX have inevitably caused the market to look at the A320 with some operators actually opting to move from Boeing to Airbus but with only 21 remaining to be delivered there is little option but to seek capacity from the used market and thus values are remaining stable, at least until such time as the MAX enters service in numbers.

Over the course of the last decade, the values of the core A320 product have performed well even though lease rates experienced a traumatic fall during the first half of the 1990s and again a decade later. One of the key strengths of the A320 family in the period 1995-2005 was the absence of any concern over obsolescence in the short term though a modest upgrade was introduced as of 2008 based on aerodynamic improvements, a new interior and upgraded engines for which the designation “Enhanced” applies. The A320neo however, is now in service and already has had a material impact on values of the A320ceo.

In the years following service entry of the A320 in 1987, sensationalized media attention raised concerns over whether the aircraft relied too much on technology. These initial anxieties have long since subsided. With Boeing launching the B737NG, there was the potential for the A320 being leapfrogged but the US manufacturer has instead focused on tried and tested technology – not least because of the need to retain extensive commonality with the existing B737 series – as well as providing operators with enhancements that aim to reduce cost and make it easier for the type to be transferred from one operator to another. Consequently, values of the A320 family remained strong even with the service entry and expansion of a worthy competitor though there have been notable troughs.

But the manufacturers rely just as much on replacement orders as they do on growth orders. The introduction of the A319 and A321 served to stimulate new orders rather than merely providing customers with a cohesive family. As the years have progressed and it has become increasingly necessary to compete effectively, the efficiency of the newer aircraft has made them increasingly attractive as have lower prices and discounted lease rentals. The changes involved a new engine variant, revised aerodynamics and an improved and lighter weight interior. CRT displays were replaced by LCD displays.

The Tech Insertion engine introduced by CFM in 2007 on the B737NG and A320 and then the Evolution and PIP continued to offer sufficient advantage over previous variants. The Evolution engine became the standard production engine for the CFM56-7B and CFM56-5B engines that power the A320 and B737NG families. IAE introduced the SelectOne upgrade for the V2500 with the SelectTwo available later with the CFM56-5B4/3 PIP the standard. For these final engine variants, the time on the wing was extended which translates into a 5-15 percent reduction in maintenance costs. The engine meets CAEP/6 regulations that came into force in 2008. The reduction in emissions compared to previous engine variants translates into lower operating costs when emission trading begins in earnest. CFM offer a full Tech Insertion core upgrade as well as an advanced compressor upgrade kit. In contrast to past trends, new aircraft prices may not continually rise. Nearly all manufacturers are engaged in cost cutting exercises and some of the benefits of such measures will be passed onto the customer. With new prices failing to appreciably rise, this inevitably has some impact on used prices. To some extent, rising new prices – those actually being paid – influence used values but if the former fails to rise then to maintain the same differential, the latter must fall faster.

To a large extent Airbus was remiss in not identifying that the door configuration on the A320ceo allowed for a greater seat count. The 180 seating capacity of the A320 has long been a factor in its lower value when compared to the 189 seat B737NG though market forces and product life cycles have also played their part. When considering the operating costs of the two aircraft then based on the maximum number of seats, the higher capacity of the B737-800 has a distinct advantage, assuming that operators use the maximum number of seats.

The demand for used spare engines and the willingness to pay more does not merely emanate from the rise in the cost of new spares but also due to increased demand as a result of the maturity of the A320ceo and B737NG fleet as well as a change in the market structure. The advancing age of the A320ceo and B737NG fleet means that more overhauls are being undertaken. The downtime in the overhaul facility is longer than in the past and this requires a spare engine to be installed for more time. With the expansion of the operator base to operators who have lesser interest in maintaining their own engines and indeed in owning spare engines, then this has increased the pressure on third part providers. The MRO organizations are struggling to cope with demand as are the engine OEMs. Operators are continually seeking to increase the utilization of their aircraft and over the last ten years the U.S. airlines have increased daily utilization from 10.2 hours in 2019 to 10.95 hours as of 2018 (Frontier and Spirit have the highest utilization at over 12 hours per day – block time). This increase in utilization sees a need for more frequent overhaul of the engines although this can be partially mitigated by greater engine monitoring and engine washes. The grounding of the B737MAX has increased the pressure on the existing fleet both in terms of utilization and downtime. Existing aircraft are having to work harder and there may be lesser slack in the system for maintenance downtime. This means that spares are needed more frequently than expected.

As aircraft age, fuel consumption typically increases by five percent or more due to wear and tear on the engines and increased drag caused partly by dents and repairs. The early A320s are facing similar, if not increased, problems associated with age. The A320 has undergone significant changes over the course of the last 25 years. Older A320s have now undergone their second 12 year check and engine overhauls are becoming increasingly expensive due to to the cost of replacement parts which rise year on year. Combined with the issue of age, those A320s built before 1997, the year that saw the introduction of the CFM56-5B4/P, and featuring earlier engine variants such as the V2500-A1 and CFM56-5A1, are considered to be increasingly exposed to a decline in value although such falls are facing all exmaples.

The A320 represented the first occasion for many years for a narrowbody to be offered with a choice of engines, the CFM56 or IAE V2500. By introducing competition between the two engine makers, Airbus sought to drive down overall pricing as stimulate incremental advances. Due to the slight difference in number of installed engines, the V2500 powered A320 warranted a discount of some $2-300,000 compared to the CFM56 equipped aircraft but such a difference has largely dissipated for more recent examples.

The A320 has experienced a number of fortunes during the course of its 30-year history, ranging from a shortage to an excess through to sustained popularity and at least parity with Boeing products. The B737-800 provides significant competition to the A320. Overall the A320-200, possessing a high MTOW and powered by either the CFM56-5B4/3 or V2500-A5 SO engine represents one of the more attractive assets to possess. It has become apparent that an age differential needs to be applied. Those A320s built before 1996 are considered to be at a disadvantage when compared to younger examples due to engine and specification changes and those produced between 1996 and 2007 before the upgraded engines were also introduced.

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