Leeham News and Analysis
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Leeham News and Analysis
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Financing airplanes in 2010
Geneva, Switzerland: During the Aircraft Finance and Commercial Aviation Conference, we filed a couple of stories in aircraft finance with Commercial Aviation Online. Since CAO is a paid subscription service, our arrangement with CAO is that it gets exclusive use for a few days before we can post the stories here.
The stories are below the jump. In them, we report what panelists had to say about the “funding gaps” in 2009 and 2010 and about aircraft values.
Funding gap exists for refinancing used aircraft: lessors
The much discussed and discredited funding gap for the airline industry does indeed exist, according to several participants in the 24th Annual Aircraft Finance and Commercial Aviation conference in Geneva, Switzerland. While it doesn’t exist for new airplane deliveries, it was conceded, several industry officials say there is a gap for used aircraft transactions and the forthcoming need to refinance airplane and capital debt in the next four or five years.
Nils Hallerstrom of PK Finance, a unit of GECAS, David Swan of RBS Aviation Capital and others at the conference acknowledged that Airbus and Boeing turned out to be correct last year when they claimed there would be no unmanageable funding gap, thanks largely to the export credit agencies in Europe and the US stepping up and more than doubling their previous participation in the markets. Nor is a funding gap for new airplanes expected this year, in part because Airbus and Boeing reduced production rates on the A320 and 777 (as did other OEMs), bringing the required funding for $62bn in aircraft from $68bn last year for deliveries for all manufacturers.
But funding for “older” aircraft, defined by some as young as five years and by others as seven-eight years, is virtually non-existent.
Hallerstrom told CAO that PK Finance has money for used aircraft debt, but Swan told the crowd listening to the leasing panel he sat on that used aircraft pricing is too costly, nudging Hallerstrom with his elbow in the process.
“There will be a lot of lessors who have to hold on to airplanes longer than they planned,” Swan said. “There will be a lot of used aircraft transactions that just won’t happen. This will [negatively] affect residual values and perhaps depreciation policies.”
Swan said banks are also showing more skepticism of valuations and this will result in very low advance rates.
“The funding gap is not relating to new deliveries,” he commented. “It’s about refinancing billions of dollars within the next four or five years that will take capital away from aviation.”
A330 values holding up
Values and rents of the Airbus A330-200 have held up quite well through the economic crisis while other equipment types have not, Owen Geach of the appraisal firm IBA told the Aircraft Finance and Commercial Aviation conference in Geneva 25 March.
Geach said the value of a 10-year old A330-200 was $53.7 million a year ago and $50 million today, with rents remaining steady at $510,000 per month. In a bit of a surprise, Geech said he does not expect A330 values and rents to be dramatically impacted in the next five- to seven years as the Boeing 787 and Airbus A350 enter service.
A new Boeing 737-800 was valued at $43.5 million a year ago and declined in value only slightly to $42.3 million today. Rents were steady at $340,000 a month. An equivalent Airbus A320 had a value of $41.1 million last year and $39.9 million today, with rents nearly steady at $335,000 a month vs $330,000 a month today.
Among the types that did not hold us well was the Boeing 767-300ER, which had been expected to perform better with an expected increased demand resulting from delays to the 787 program. A 10-year old 767 was valued at $36.7 million a year ago and $32.7 million today, a 10.9% decline, but rents dropped from $515,000 a month to $380,000 a month, a drop of more than 26%, according to Geach. He was challenged by an unidentified member of the audiences who said he has seen rents drop below $200,000 a month.
Geach said a 20-year old McDonnell Douglas MD-80 had a value of $3.6 million a year ago vs $2.5 million today with rents of $60,000 a month and $51,000 respectively, but he added that Alitalia’s fleet of MD-80 had price tags of $400,000 to $500,000, largely because of condition and the absence of complete records.
A 20-year old Boeing 737-300 had values of $6 million and $4 million with rents of $109,000a month and $86,000a month year-on-year, Geach said.
Without providing numbers, Geach said the Airbus A321 had an edge over the Boeing 737-900ER, which he characterized as being placed with weak credits. The oldest A320s were “in trouble” and some are being parted out, which is also true for Boeing 757s, he said.
The Airbus A340-200/300 is cheap lift vs. the Boeing 777, but the four engine configuration remains a detriment. The 777-300ER remains the “top-performing” wide-body in today’s market. The Boeing 747-400 is depressed by the current over-supply and the forthcoming retirement of the entire fleet type at Japan Air Lines.
Thanks for this coverage which is informative and gives some idea as to what are values in the resale and leasing market.
Would anyone know enough to share some thoughts as to what these effects will be on the Leasing Companies. Does this jeapordize any cash flows or net worth of any of the firms involved in this area of financing.