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Healthy competition; the used aircraft market and increasing demand: IBA reports on the ‘vibrant market’ of aviation

According to IBA, the award winning aviation consultancy, one of the most regularly discussed industry topics is the continued disconnect between values and lease rates of popular narrowbody aircraft. Continued lower oil prices have driven increased demand for later build Airbus A320ceos and Boeing 737-800s than was originally anticipated.

This is likely attributed to their proven technologies, giving a steady operational platform, and IBA believes the established reliability of these older models is a contributing factor to the apparent contradiction.

IBA’s research and data platform IBA.iQ suggests that lease term lengths on new narrowbody aircraft are shortening, while extension opportunities on the older equipment are rising.

There are more sales with leases attached and IBA is seeing strengthening sale and leaseback pricing as well. The market is rich with liquidity and more firms are looking to do deals on lower risk narrowbodies which indicates healthy competition to close lease deals. This in turn is driving down rentals, and Lease Rate Factors. In 2013, a brand new Airbus A320ceo was seeing an LRF in the region of 0.71%. Fast forward to 2018 and the LRF is nudging 0.50% in the sale leaseback market. These are significant changes.

Moving to widebodies, for newer models such as the Boeing 787-9 and Airbus A350-900, investors are keen to do sale and leaseback transactions. This is understandable because they are operated by high quality lessees and there is a rapidly expanding operator base. The leading edge technology found in these aircraft is also a major plus. IBA understands that OEM discounts continue as they grapple to secure widebody market share.

This will increase pressure on values and lease rates further down the road. AA’s re-order of the 787-8 provides some boost to the smallest variant but will the long-term fortunes hold out given preferences for the middle and larger members of the family? Towards the older end of the spectrum, A330s have proven to be remarkably robust in transitioning between operators, but lease rates are low enough to make them attractive.

Jonathan McDonald, from IBA’s Commercial Intelligence team and author of their Aircraft Values and Lease Rate Factor Books for 2018, observes: “These are positive market characteristics and considering that the Boeing 787-9 and Airbus A350-900 are still in early stages of the production process and have no threat of imminent replacement, their residual values are expected to remain buoyant. Most recent secondary transactions involving these models have been sale and leasebacks, operating leases, and a few sales with leases, contributing further to strong value retention.”

“Healthy Boeing 787-9 and Airbus A350-900 trading values have not equated to correspondingly sky high lease rates” he continues. “Despite there being some high quality carriers operating these models, they are often able to negotiate lower lease rates. Furthermore, the industry has seen a lot of new players (in terms of leasing companies) plus a host of keen new entrant investors from numerous countries, including Korea, looking to be involved in transactions, creating increased competition to execute deals.”

New models and variants continue to enter service, the first Airbus A350-1000 was handed over to Qatar Airways in February, whilst in March, Lion Air took delivery of the very first Boeing 737 MAX 9, with United also taking their first MAX 9s shortly thereafter. Singapore Airlines has received the first Boeing 787-10. Embraer has recently handed over the first E190-E2 to launch customer Wideroe, and Iberia is due to take the first upgraded Airbus A350-900, which features a number of aerodynamic improvements.

The burning question suggests IBA, is will these aircraft impact values of the models they supplant, or other models?

“In the case of the Airbus A350-1000, its target is the ubiquitous and very successful Boeing 777-300ER” suggests Jonathan McDonald. “As the values displayed in our report clearly show, there is no sudden and negative impact on Boeing 777-300ER values as a result of the Airbus A350-1000 now being in service. We still need a few more years to see how the newer Airbus A350-1000 and eventually the Boeing 777-8X/9X perform, before contemplating noteworthy reductions of Boeing 777-300ER values.

Despite this, IBA is seeing a little more in terms of Boeing 777-300ER secondary market activity, and it is known that several Emirates aircraft are coming out this year, and are already earmarked for Russian carriers.

“The Boeing 737 MAX 9 will eventually supplant the present Boeing 737-900ER. The MAX 9 has faced sluggish sales relative to the Airbus A321neo, with many perceiving it to be a minority variant sitting uncomfortably between the MAX 8 and MAX 10 that has subsequently been launched to better compete with the Airbus A321neo.

Just as Boeing 737 MAX 8 aircraft have not yet impacted values of the Boeing 737-800, IBA do not see the Boeing 737 MAX 9 having any short term impact on values of the Boeing 737-900ER, but we also don’t expect all 737 MAX 9’s on backlog to deliver either, as the 737 MAX 10 economics will win through.”

Similarly, IBA does not foresee a sudden drop in values of the Embraer 190 now that the E2 is present. The slight softening of values for the Embraer E170 is not the result of the E2 being present, but more the fact that airlines such as Saudi Arabian have off-loaded a substantial fleet, the operator base is fragmenting, and that demand is generally greater for the larger derivative models like the Embraer 175 and 190.