Special report: Values in pieces

With aircraft values under serious pressure, several older types may be headed for the wrecker's yard

the sluggish recovery has led to an imbalance in aircraft supply and demand, causing the value of some models to collapse. But the trading community appears to be reaching a consensus that lease rates have stabilised. The bad news is there is typically a one- to two-year lag between lease rate and aircraft value improvements.

Flightglobal's ACAS database reveals there were 1,859 narrowbody aircraft parked in January 2010, or 14.5% of the total narrowbody fleet. This compares with 1,691, or 13.7%, a year earlier. Over the past 12 months, more than 200 Boeing 727s, 737-200s, MD-80s and McDonnell Douglas DC-9 have been taken out of airline operations.

The recent rise in aircraft auctions underlines the fragility of the market. To date, distressed sales have been limited because potential sellers have been holding on to their assets, but, as the market continues to deteriorate, some will have little choice but to dispose of their assets.

© Rex Features/DR

Meanwhile, owners of older aircraft are finding that operating leases are no longer a viable option because of the transition costs.

Some values have dropped so much over the past 18 months that parting-out is the only option. Meanwhile, appraisal firm IBA says the recession has been fatal to the McDonnell Douglas models, whose storage levels are beyond recovery. This will force aircraft to be parted-out, accelerating their retirement.

The 737 Classic is also a recession casualty. Over the past year, about 35 have been scrapped and the inventory of parked aircraft has grown by 76 aircraft to almost 300, of which 200 are 737-300s. Aircraft prices are now so low that certain traders are only interested in parting out aircraft, which is likely to drive prices down even more.

The scrapped market has become increasingly popular with the teardown specialists in the mid-$2 million market. An airframe can sell for $400,000-500,000 while engines, in good condition, can reach $1 million each.

"The parting-out process has become a common activity for the earlier specification 737-300 aircraft, and values are representative of this scenario," says IBA Group's head of valuations and modelling Stuart Hatcher. "Later-build aircraft have not fared any better in percentage terms, despite many being young enough to fly for many years to come."

Hatcher believes early 1990s-built CFM56-3C1-powered aircraft could be a bargain for start-up airlines, as values will be in the $4-6 million range, while later-build aircraft that are only 11-13 years old should hold some additional value only as going concerns.

Aircraft value appraiser Collateral Verifications says the current market value of a 1984-vintage 737-300 is $3 million, while valuing the 1999-build at $7.69 million. "Values have dropped by about 50% since the fourth quarter of 2008, of which the drop since the first quarter of 2009 has been around 30% for a 1993-build example," he adds.

Post 1990-vintage aircraft have been sold for $2.5-4 million, while recent bids on some 1989 examples are in the $3 million range, say trading sources.

Airbus A320s have also been affected, with early vintages suffering the most. Older A320s now compete with 737 Classics and are being deployed in countries where 737/MD-80/DC-9s were previously the norm. Good-condition MD-80s can now sell for around $2 million, while early A320 models can attract $5.5-6 million.

Many early-vintage aircraft which are being returned are proving difficult to place. Although the average fleet age is just eight years, the A320 model is suffering because some countries are not accepting aircraft older than 15 years. This means the part-out market for old A320s has started to make sense for some owners. Trading sources say an aircraft can be parted out for as little as $4 million.

Collateral Verifications' commercial vice-president Gueric Dechavanne says A320 values in the last upturn showed roughly a 10% improvement in 2006-07, from a low of around $11 million for the oldest vintage. But the market for the old A320s has eroded and aircraft that were trading in the $12-13 million range now have a value of $6-7 million.

"The second-hand widebodies market will eventually recover, later than narrowbodies" Stuart Hatcher Head of valuation, IBA Group

Hatcher says: "The A320 has had a mixed year, with the oldest examples going for part-out and fetching values in the $6 million range. Aircraft that were built post-1993 are doing a little better and should achieve values of around $11 million, although CFM56-5B-powered aircraft may fetch about $1-2 million more in half-life conditions." He adds that values have dropped by 12-15% since the last quarter of 2008, but most of that was in the first quarter of 2009.

"The A320 is going to be around for a long time, so I expect values to bounce, but should either OEM push for a significant engine upgrade, then there could be increased pressure on the type, and values may remain low," he says.

WIDEBODY RECOVERY

The market for widebody aircraft may need some recovery time, but the worst is considered over and values of in-production models are expected to remain at current levels. "The second-hand widebodies market will eventually recover, later than narrowbodies, as more finances are required behind their transactions," says Hatcher. "Traffic levels would have to increase to justify the purchase of higher-capacity models. Secondary market transactions for widebody aircraft will recover in line with traffic at the back end of 2010."

The widebody parked fleet has risen to 567 aircraft in January 2010, from 406 in January 2009. During the 12-month period, more than 80 Airbus A300/A310s, Boeing 747s and McDonnell Douglas DC-10s have been taken out of the system.

The market for Airbus A340s may remain difficult in the current economic climate, but the Boeing 767-300ER and 747-400s stand out. Over the last six years the 767-300ER has been used as interim lift for the Airbus A350 XWB and Boeing 787, but players are looking at this aircraft with a short-term perspective.

Dechavanne says the 767-300ER has lost anywhere from 20-50% of its value, and lease rates dropped 15-20% over the course of last year. He adds that older 767-300ERs now have a market value of $8 million, but the scrap market has been acquiring aircraft in the $7 million range.

Hatcher says the lease rental "boom" for the 767-300ER is over and the type is crashing back to reality. "When passenger numbers fell and aircraft were parked, there was no freight market to come to the rescue. Values had already been falling this time last year, but over the past 12 months values have dropped by another 17% for a 1995-build aircraft, and 12% for a new-build aircraft."

Japan Airlines' bankruptcy is not helping the already "depressed" 747-400 market. Over the past year, parked examples have doubled to 54 aircraft. JAL, which operates 36 passenger aircraft and seven freighters, is seeking its salvation through smaller aircraft, and is poised to retire its entire 747-400 fleet.

Since the beginning of 2009, Dechavanne says the 747-400 market has suffered a 30% drop in value and lease rates have fallen 20-25% compared with the same time last year. He adds that older model values are now in the $22 million range. Meanwhile Hatcher estimates that the value of a 12-year-old 747-400 has dropped by around 23% since the first quarter of 2009. Today, a 1998-built aircraft is valued at $40-42 million.

The 747-400's future may depend on demand from the freight market. Dechavanne believes "a large majority" of today's 391 passenger-configured aircraft will be converted as freight demand recovers and ageing aircraft, such as the 747-200F, need replacing. He adds: "It also appears that values of this aircraft may not rebound a great deal during the next recovery, I expect this trend to further justify the conversion of these aircraft."

During previous industry crises Dechavanne says 747 values have "always bounced back". But he adds: "Given the lack of freight demand and the strong push towards twin-engined aircraft, this scenario is becoming less likely."

Source: Airline Business