How much value aircraft have lost?
With the drop in demand, the overflowing supply of used aircraft on the market made very significant changes to the way aircraft are priced. The latest order by Alliance Airlines, an Australia-based airline that also provides charter services, shows how much.
Alliance Airlines announced that it has entered an agreement with Azorra Aviation, a United States-based lessor to expand its fleet by 14 Embraer E190 aircraft. The deal, valued at $79.4 million, also includes six spare General Electric CF34 engines, and a package of inventory related to the aircraft, ground support equipment and training devices.
In addition, the Australian company will have the option to purchase an additional five Embraer jets, including a full-flight simulator and related training equipment.
The order for the used E190 aircraft would mark a significant expansion of Alliance Airlines’ operations, as the all-Fokker aircraft operator would grow by a third of its current size. As of August 3, 2020, the Australian airline owned 37 Fokker jets and five Fokker F50 turboprops in its fleet. A further three aircraft were stored, according to the company.
The $79.4 million acquisition for the 14 Embraer E190 jets would mean that one E190 cost Alliance Airlines a measly $5.6 million per aircraft. However, since the deal also includes six spare GE CF34 engines and further assets related to the narrow-body jet, meaning it would not be crazy to speculate that the price for one E190 was much cheaper.
The acquisition by Alliance Airlines presents a very stark contrast to a deal that Japan Airlines made during the Paris Air Show 2017 in June 2017. The Japanese carrier ordered a single new E190 jet during the tradeshow. At the time, Embraer indicated that the list price of the aircraft stood at $50.6 million. During the Dubai Airshow in November 2019, an Egyptian leasing company called CIAF Leasing shook hands with the Brazilian manufacturer for three E190 aircraft, valued at $161.4 million at list prices.
While not very significant, the list price grew by $3.2 million from 2017 to 2019.
Even so, the E190 depreciated in value massively as the crisis hit the global aviation sector. With a newer version, the E190-E2, available at the market at an eerily similar price for a better performing product. Furthermore, used E190 overflowed the market throughout 2020, as operators such as Air Canada (ADH2), American Airlines (A1G) (AAL) retired the aircraft from active service.
In total, 231 Embraer E190s are stored throughout the fleets of airlines, according to planespotters.net data. As of March 31, 2020, Embraer delivered 564 jets, with four additional units in the backlog. Thus, out of the total 543 units, including the backlog and excluding 25 aircraft that were either scrapped or written off, 42% of the world’s total E190 fleet is currently stored.
More than opportunistic
But the Australian company planned its growth and was not opportunistic, according to its Managing Director, Scott McMillan.
“With many airlines not flying and the increased demand for a 100-seat narrow-body configured aircraft in the Australian market, this acquisition is more than opportunistic, it underpins our expected growth.”
However, in some way, Alliance Airlines was stuck between a rock and a hard place. Its all-Fokker fleet, which will remain in service due to the company’s spare parts reserves according to McMillan, is showing its age. Furthermore, the Dutch manufacturer has not produced a commercial aircraft since 1996, meaning there are limited opportunities to acquire newer Fokker jets or turboprops. Its only way to squeeze out of its situation was an alternative aircraft and manufacturer.
“With limited Fokker aircraft acquisition opportunities, it was also the time to acquire a newer aircraft in order to position us for our next growth phase,” added McMillan.
In order to come up with the funds to make the $79.4 million deal work, the carrier raised A$121.9 million ($87 million) through an underwritten institutional placement and a share purchase plan, completed in June 2020. Alliance Airlines was not scared off by the current economic downturn, which had a profound impact on the aviation sector – the presentation to potential investors stated that the global aircraft fleet grounding presented opportunities for the company to expand its fleet to satisfy demand.
“Alliance, since inception in 2002, has a track record of purchasing aircraft at opportunistic times and at significantly reduced value to their market value,” concluded the managing director of the Australian company.
Seemingly, the opportunities will not end here, at least in the short-term.
In the narrow-body market, where demand was booming prior to the crisis, prices are going down.
“Single-aisle aircraft values are now trending downwards as with such a large portion of the fleet grounded, demand for spare engines and parts is extremely weak and the part-out buyers do not have the liquidity to trade,” according to Cirium, a data and analytics company.
An Embraer spokesperson, however, noted that the company's E-Jets are "the ideal aircraft for airlines as they look to manage through this extraordinary crisis," as the Alliance Airlines' announcement is "yet another example of the value that E-Jets bring to airlines in even these difficult times."
"With respect to underlying ‘storage’ (i.e. excluding transitions, airline operational adjustments, etc.) it is fair to say that E-Jet storage levels are still on the lower side of the industry norms and we expect this trend to continue. This is because of the lower gauge of aircraft, and of course lower trip cost means the aircraft is the ideal aircraft for airlines to manage demand fluctuations," added the manufacturer's representative.
And while it could be said that the E190 or the Mitsubishi CRJ1000 are not the most popular single-aisle jets, even the Airbus A320-200 and the Boeing 737-800NG have lost value throughout the crisis, with an average downturn of 16% and 18%, respectively, according to ch-aviation data.
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