winners and losers in softening market
It’s 2017 and OEMs are producing wide-body aircraft at historically high production rates following earlier periods of constraint under poor economic conditions and delays in new-technology replacement programs. At the same time, OEMs have seen reduced orders in a softening market and have struggled to fill production slots available before the advent of next generation Airbus A350 and Boeing 777 aircraft. Searching for an outlook on the changing market, AeroTime talked with Angus Mackay and Stuart Rubin, both analysts at ICF, an international consulting agency.
Wide-body storage numbers remain intractably high, and of particular concern, younger aircraft below 20 years of age comprise the majority of those wide-body aircraft in storage. Moreover, growing numbers of current generation A330 and 777 aircraft are expected to return off lease in the near term in a wide-body market dominated by lessors.
The current twin-aisle wide-body market is also affected negatively by the increasing range and capacity of larger narrow-body aircraft such as the Airbus A321LR and soon by Boeing’s new 737 MAX family of aircraft which can operate over nearly 50% of present wide-body routes. Airlines are increasingly hesitant to acquire larger wide-body aircraft that can only be filled on densely traveled routes.
In this exclusive interview to AeroTime, Stuart Rubin and Angus Mackay, leasing analysts at ICF share their views on the wide-body aircraft market.
Angus Mackay (left) and Stuart Rubin (right)
Can you comment on current and planned production rates for wide-bodies?
Monthly wide-body production increased significantly from 2011-2013 – largely due to Boeing’s resolution of 787 production problems – by 2016 rates were in the 35 units/month range. However, both Boeing and Airbus are heeding the experiences of past downturns and have become proactive in adjusting wide-body production rates to meet fluid market demand for specific products. Boeing announced in December it would lower the monthly rate on the 777 from 8.3 to five by August 2017 although ICF believes a further reduction in the rate may be warranted as EIS of the 777x draws near. Airbus has been keen to adjust monthly rates for the A330 to reflect changes in demand, going from 10 units per month to six in 2015, but then increased monthly production to seven, reflecting improved demand for the type.
Looking to the future, monthly production rates for the new-technology 787 and A350 are each expected to reach double digits by 2018 when Airbus plans to build 10 A350s per month - Boeing is already producing the 787 at a rate of 12 per month. Both OEMs will be looking to increase production to deliver on the significant backlogs for these aircraft however over the near term market softness would likely temper any increases.
What are the effects on values and lease rates?
With significant OEM discounts for new-build end of production cycle aircraft, the effect on values for older aircraft is very severe as it is for newer last-of-production aircraft. Older, less-efficient and lower-valued aircraft will generally be retired first.
The secondary wide-body aircraft market e.g. the A330 and 777 market has been challenged for some time with high reconfiguration costs and slackening demand leading to significantly reduced values and lease rates upon redelivery.
Year-on-year value and lease rate declines exceed 10% and those aircraft being placed into second lease terms are attracting lease rates which may be only 50% of initial rates.
What aircraft types can be considered winners and losers at present?
While the wide-body market can be generally best characterized as soft, the greatest losers are the large and VLA four-engined wide-bodies such as the Boeing 747-400, the A340 family in general, and the Airbus A380. Even in a low fuel cost environment these aircraft are significantly more expensive to operate than their twin-engined competitors. Few secondary operators have the market or networks to deploy such aircraft and the reconfiguration costs are eye-watering.
In the twin-engined cohort, the Boeing 777-200ER provides an example of a wide-body aircraft proving difficult to place, with elevated storage levels remaining relatively constant year on year. The A330-200 has proved less-favoured than its larger A330-300 sibling with growing numbers expected off lease over the next two years. Those younger 777-200ER and A330-200 aircraft proving most difficult to place have, in the main, are powered by Rolls-Royce engines.
Of current generation twin-engined wide-bodies, the A330 family, and in particular the A330-300 appears to have greater market liquidity than the Boeing 777 family, enjoying a broader operator base and relatively more aircraft returning to service over the past year.
Despite slowing new orders for next-technology wide-body aircraft, both manufacturers have several years of order backlogs. In the case of Airbus, the A350 family enjoys an order backlog of nearly 750 aircraft while Boeing has a backlog of nearly 700 units for its 787 family. An eventual rebound in orders is expected as long-delayed wide-body fleet replacement decisions at U.S. major legacy carriers take effect, particularly for the venerable Boeing 767-300ER and 777-200ER families of aircraft currently in service.
The first A380 lease returns will occur later in 2017. What are your views on secondary market opportunities for the A380?
To date, there has been very limited secondary market for the A380. Given the aircraft’s size, the number of candidate operators that could effective employ the aircraft is limited and reconfiguration costs are likely to be substantial for a traditional 3-class layout. Further clouding the potential secondary market is the operator base which is very thin and dominated by Emirates which accounts for nearly half of the aircraft in-service and on firm order backlog. Such operator concentration is detrimental to asset liquidity and opportunities to place used aircraft.
Present first-tier operators have configured the aircraft with suboptimal premium seating layouts well below 500 seats. Airbus and lessor Amedeo, are hopeful that the A380 will enter service with LCC carriers in configurations approaching 700 seats for long haul leisure markets, thus maximising the revenue potential of the aircraft. Market participants are also optimistic that growing hub congestion in the medium term will eventually force operators to order or lease VLA aircraft such as the A380 and 747-8i. Potential opportunities may also lie with operators such as International Airlines Group (IAG), one of the world's largest airline groups, which sees second-hand A380s as an attractive incremental lift prospect.
Further complicating the outlook for a secondary market for the A380s is the lack of a freighter conversion program as well as possible derivative developments – fuselage stretch (-900), re-engining (A380neo) - being explored by the OEM. Most affected in terms of value diminution are low gross weight early-build examples which encountered wing component cracking issues requiring extensive repair work.
Angus Mackay is a principal with ICF and specializes in asset valuation, asset management, aircraft performance and specifications, and logistics management. Mr. Mackay is also an FAA-licensed commercial pilot and flew with a regional airline in the Northwest United States and a major Australasian airline. He is an International Society of Transport Aircraft Trading (ISTAT)-certified Senior Appraiser.
Stuart Rubin is a principal with ICF and specializes in asset valuation, aircraft market research, asset management, and lease analysis. He has extensive experience in valuing tangible assets and performing market analysis and financial modeling. Mr. Rubin is an International Society of Transport Aircraft Trading (ISTAT)-certified Senior Appraiser.
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