Competition, rising demand and older aircraft sustaining vibrant market – IBA report

By April 30, 2018 January 16th, 2020 General News

The healthy level of competition between commercial aviation lessors, the established reliability of older aircraft, and ever-increasing demand is sustaining today’s vibrant market with buoyant residual values, according to specialist consultancy IBA.

One of the most regularly discussed industry topics is the continued disconnect between values and lease rates of popular narrow-body aircraft, it says. Continued lower oil prices have driven increased demand for later build Airbus A320ceos and Boeing 737-800s than was originally anticipated. This is likely because of their proven technologies, giving a steady operational platform, according to IBA, which believes the established reliability of these older models is a contributing factor to the apparent contradiction.

Lease term lengths on new narrow-body aircraft are shortening, IBA’s research and data platform ‘IBA.iQ’ suggests, while extension opportunities on older equipment are rising. More sales with leases attached are taking place, 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 narrow-bodies, which indicates healthy competition to close lease deals. This in turn is driving down rentals, and lease rate factors (LRF). 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,” it stated in its latest industry comment.

New aircraft models and variants continue to enter service, meanwhile. The first Airbus A350-1000 was handed over to Qatar Airways in February, while in March Indonesia’s low-fare carrier Lion Air took delivery of the very first Boeing 737 MAX 9, with United also taking their first MAX 9s shortly after.

Singapore Airlines has also received the first B787-10, while Embraer recently handed over its first production E190-E2 to launch customer Widerøe of Norway. Iberia is also due to take the first upgraded A350-900.

 

Impact on values

The burning question, according to IBA, is whether these aircraft will impact the 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,” said Jonathan McDonald from the consultancy’s commercial intelligence team. “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.”

He continued: “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 9s on backlog to deliver either, as the 737 MAX 10 economics will win through.”

IBA also says it does not foresee a sudden drop in values of the Embraer 190 now that the E2 is on the scene. “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 Saudia 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,” it added.