Appraisers expect more commercial aircraft to be parked this year.
According to Flightglobal’s Ascend Online database, there were 2,573 aircraft in storage at 1 March 2012, compared with 2,470 aircraft in January.
Ascend director of valuations Les Weal says too many new deliveries and shaky demand will result in more storage. “Airlines in the European Union especially require some form of capacity control,” he comments.
ICF SH&E’s VP Ken de Jaeger expects more aircraft going into storage as a result of more bankruptcies this year as well as merger activity, soft economic conditions and elevated fuel prices, along with the usual exogenous shock.
“I believe that more of the older generation aircraft will be parked due to the increased availability of newer, more efficient aircraft. I feel this will be due to not only the increase in production rates from the OEMs, but also to the increased availability of newer used aircraft from the leasing community,” says Collateral Verifications’ VP Commercial Aviation Services Gueric Dechavanne.
Fintech Aviation Services’ managing director Oliver Stuart-Menteh anticipates freighter aircraft and older widebody aircraft will be parked progressively. According to him, narrowbodies over 15 years of age are also candidates.
IBA Group’s head of valuations and modelling Stuart Hatcher says that the view of the market is when an aircraft is over five years old, it is considered difficult to place. “With production increasing, the limited finance available will be chasing new deliveries instead. The much older and less economically viable aircraft will be even tougher to place and part-outs will increase, that is unless there is some life left. Many airlines that don’t have the luxury of access to finance from the markets or banks for re-fleeting will do well to buy the cheaper alternatives. Whilst the maintenance and fuel burn may be higher, the costs and risks associated with buying new will not put them in any better position. Lessors will be happy to give them a good rate too! It is worth noting that the number of young aircraft part-outs remain few and far between but they are headline grabbing, which in turn weakens the confidence of investors.”
“Whilst the best of the bunch (newer Next Generation aircraft A320s, A330s, 777s) will come back, with the majority of finance being available to aircraft under five years old, the rest will prove a challenge to shift.
There is no denying that funding pressure impact second-hand aircraft values, especially middle aged aircraft.
“Since most investors and financiers prefer to go with new aircraft, used aircraft continue to be expensive to finance, which will affect their values,” comments Dechavanne. “As long as used aircraft continue to be perceived as higher risk assets, this trend will not go away.”
Stuart-Menteh says the lack of funds by itself will only affect a relatively small percentage of the used market. “However a reduction in demand will have a far more pronounced affect across the board.”
Hatcher opines that if the current trend continues, the secondary market will continue to have a problem until second-tier airlines stop buying large numbers of new aircraft. “They [second-tier airlines] can’t afford them, but with the level of Export Credit Agencies (ECA) guarantees that have been available up until now, who can blame them?” he comments.
Hatcher calls for a more balanced approach. “The ECAs are there to support the OEMs, but they also want to reduce the level of support they provide. With production stepping up, there is already a gap forming,” he says.
According to him the ECAs would do well to support some secondary transactions as well (which has happened in the past) and encourage others to re-enter the space.
“Whilst the market remains so delicate, it is important for the ECAs to carry on supporting the OEMs, but we can’t avoid the fact that if older aircraft won’t sell then there will be a value gap. With relatively low margins available for newer aircraft for most buyers, the potential gains from trading secondary aircraft in the right market should attract more, but it doesn’t.
“If this process evolves into a permanent solution then the industry will have a real problem as the value curve will be unable to support any long-term finance. Whilst the economical useful life may remain intact, the depreciation will look very different from five to six years onwards that it does today.”
Worst aircraft performers in terms of values and lease rates last year were the Airbus A340-300, the Boeing MD11, the Bombardier CRJ100/200s, the Embraer ERJ-135/145s, and the Boeing 737-400/500s for Dechavanne. “All of these aircraft saw reductions in value of about 25-30% throughout 2011,” he says.
De Jaeger estimates the MD-80 series especially now with the American Airlines’ bankruptcy was the worst performer in 2011. “Close second, the ERJ-135/140/145 family is quickly falling out of favour while the A340 is falling fast.”
Hatcher agrees: “Airbus abandoning the A340 production line speaks volume of the aircraft poor performance and its difficulty in grabbing the attention of operators and financiers. On the narrowbody front, whilst the oldest aircraft were hit hardest two years ago, 2011 saw an increasing gap between the new deliveries and aircraft over five years of age.”
“Values for all older (out of production) four-engine widebody aircraft such as the 747-400 and A340-200/300 and -500/600 have, and will continue, to floundered as their future role becomes less certain,” comments Stuart-Menteh.
Source: Commercial Aviation Online
