Value differentials between the re-engined narrowbodies and their predecessors remain compressed, in the view of appraisers who participated in a panel discussion at the ISTAT Americas conference in Phoenix on 29 February.
Two trends have served to narrow the gap separating the Boeing 737 Max and Airbus A320neo single-aisles from, respectively, 737NGs and A320ceos, argued Avitas's senior vice-president of asset valuation Douglas Kelly. One is oil prices; the other is price competition driven by the manufacturers' being so "keen" to sell new aircraft.
"We're seeing the margins, the delta, between current generation and next really coming down," confirms Kelly.
IBA Group chief executive Phil Seymour recalls that when the Neo was first announced, "probably the target was seven million dollars over and above the Ceo". Now, he says. "the differential in price should only be two or three million". Aviation Specialists Group president Fred Klein agrees, saying a "value delta" of $2-3 million is "exactly what we're seeing".
Seymour sets out the predicament the tight margin creates for airlines committed to the re-engined types. "If you've ordered those airplanes, you're tied into escalation – why wouldn't you be – so the issue is: what is that final price going to come out at today? And how is that going to be reflected in the lease rate?"
He adds: "I don't know where the airline is going to go. It can't say now that it doesn't want to pay for that added advantage, so something's got to give somewhere. It is a dilemma."
Focusing on the secondary market, Seymour notes that "three or four years ago" the lease rate for a 10-year-old A320 would have been around $150-160,000, but now, for "reasonable credits", the figures are "much healthier" at around $220-230,000.
"So things do come back," he says, "and that's why I still have hope with the 777 and A330."
During the airline panel later the same day, audience members were polled on how they saw the A320neo lease-rate premium over the Ceo, and a $20-30,000 range proved most popular among voters.
Panel moderator Rob Morris, head of consultancy with Flightglobal advisory service Ascend, noted: "As an appraiser, we've got an opinion. we've actually got a $45,000 lease-rate premium on this airplane today." But he adds that a sensitivity analysis (see chart below) moves the figure toward the range selected by the audience.
"At today's price of around $1 per US gallon, then the justified premium – to deliver the same block hour direct operating cost – is $25,000," Morris elaborates. "Our $45,000 is closer to $1.75 per US gallon, which at typical crack spreads would equate to around $65 per barrel crude oil. The $45,000 is also what we have typically been seeing in the market for early deals."
Air France-KLM senior vice-president of fleet Nina Jonsson, another airline-panel participant, voices the radical view that the premium is, in fact, zero. "The reason I say zero is: I've never liked value pricing of aircraft. The benefit that comes from improved fuel economy on what's basically a re-engining programme, you want that obviously to be part of the aircraft-replacement economics and not necessarily pay the OEMs more."
She adds: "Secondarily, I think there's a premium right now because there's clearly a lack of access to aircraft in production at the moment – typical supply and demand situation – but we're not in a hurry to replace our aircraft, so I would prefer to wait out the market a little bit and see, once the current-generation aircraft are no longer offerable, whether that premium really holds. And I'm willing to bet it won't."
Air Canada's managing director aircraft programmes Douglas Finn argues against the whole notion that a premium should be considered applicable to new technology. "That financial analysis, your evaluation that justifies your purchase of the latest technology is what it is, that's the price you pay, and the lease rates drive off of those purchase prices. And then if you have Classic aircraft, you should be looking at that as a discount to the baseline."
Source: Cirium Dashboard
