Dissecting the United A319 deal: implications

Discussion

United clearly took advantage of an opportunity created by the convergence of a few key factors: low fuel prices, looming availability of the A319, the growing lack of popularity of the A319, the low rents today of this airplane and the lower rents in the future.

United is particularly adept at taking advantage of the moment. Several years ago when the world was in a global recession, United told owners and lenders of the Boeing 757 that it was prepared to return them if rents and debt rates weren’t readjusted. The pricing UA demanded was astonishing low for the era. We don’t have visibility whether UA got the prices it wanted, or something close to it–but we expect United to have won more than it lost at the time because it took advantage of market conditions. Nobody wanted 757s back during the Great Recession. The airplanes would just sit and sit.

While the global economy is hardly in the shape today it was then, United is just as astute today as it was then.

The A319ceo, along with the Boeing 737-700, is no longer a popular airplane. As fuel prices zoomed upward, the extra revenue-producing capability of the A320 and 737-800 became paramount. These larger aircraft have operating costs that aren’t that much greater than the smaller A319s and 737-700s. These smaller aircraft once made up a respectable market share of sales. Today they are low single-digits; even the re-engined A319neo and 737-7 have proved to be undesirable, and some–including this column–doubt these airplanes will ever be built.

A319 Deal May 2015

Current Market Values and monthly rentals as reported by appraiser Collateral Verifications in January 2015. United’s rent will be less than today’s CMV-based rents. Click on image to enlarge.

With the Baby Airbus and Boeings aging, the market is soon to be rife with too many airplanes and not enough demand. Accordingly, prices will drop. Lessors aren’t going to want to scrap these airplanes as they come off 10-12 year leases; these are on their books at values such that selling or scrapping the airplanes will incur a major write-off with a resulting hit to the balance sheet.

The 25 aircraft leased by AerCap to China Southern Airlines (an inheritance from AerCap’s acquisition of International Lease Finance Corp.) are 2003-2007 build. Collateral Verifications, an aircraft appraisal company, in January placed the Current Market Values of the A319s between $14.4m and $18.63m and rents between $130,000/mo and $170,000/mo. A320s of similar vintage rent for about $50,000/mo more, according to CV. By the time United begins taking delivery next year, and through 2021, the rents are going to be significantly less.

This is not good news for Bombardier, which hopes to sell the CS300 to United. Although Bombardier has had its share of difficulties selling the CSeries for a variety of reasons we’ve written about many times, one of the biggest challenges is the availability of cheap A319s and 737-700s. One lessor told us that the case to sell the CS300 at a lease rate of $320,000 a month is tough to make when you can get an A319 or a -700 for $100,000 a month (or thereabouts). BBD responds that its new technology, fuel efficient airplane still is a better deal than an old A319 or -700. Tell that to United, to which BBD has been pitching the CS300.

This is not to say BBD won’t eventually sell the CS300 to UAL. But Delta Air Lines chose to lease in 86 Boeing 717s at a cheap price rather than proceed with a CS300 acquisition.

For Embraer, its E-175s appear to be in a sweet spot at United, and by extension, other carriers. It’s too small to compete with the A319 and -700s and it’s larger than the aging, and obsolete, CRJ-500s and E-145s. The smaller RJs are no longer economical, even with the reduced fuel prices of late. The A319s are significantly larger, and more expensive to operate than the E-175, but they allow two-for-three flights at a low capital cost with commonality to United’s existing A319s. The E-175s can either combine CRJ-ERJ flights or accommodate growth.

Conclusion

The deal for United is shrewd.

For Bombardier, it’s more frustration.

For passengers, it’s a good move, too. Getting rid of those cramped CRJ and ERJs and getting real overhead bin space in the bargain is a real plus. The E-175 is a far superior passenger experience to these Tinker Toy jets.

 

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