Nov. 9, 2020, © Leeham News: Aircraft prices and lease rates are plunging as the COVID-19 pandemic continues to devastate the airline and manufacturing industries.
The Australian newspaper reports that Rex Airlines will pay A$60k/mo for its ex-Virgin Australia Boeing 737-800s, rising to A$100k after 12 months. This is US$43,600 to US$72,700.
Rex is a small regional airline that is leaping to a jet operator. It committed to take 10 737s.
The article says the airplanes are more than 10 years old.
Compare the rates to the rents listed Nov. 2 by Ishka, the UK-based appraisal and consultancy firm: US$115k/mo for a 15-year-old model.
It’s not especially surprising that swamped with excess airplanes that lessors will place airplanes for whatever they can get. Lessors are under great pressure to service their own debt.
Even Ishka’s estimates for 20-year old airplanes are higher than the Rex rates.
But the real story is what new airplanes are going for. And the prices are eye-popping low.
As long as anyone can remember, Boeing was firm about maintaining profit margins on its sales. The 737 family was the most profitable airplane for Boeing for decades.
Boeing desperately needs new orders and the cash flow that comes with deposits and progress payments. Recertification of the MAX is imminent. Deliveries follow shortly and production is underway at a low rate.
Wall Street aerospace analysts tell LNA that Boeing Chicago gave Boeing Seattle the greenlight to offer what it takes to sell the MAX.
LNA is aware of a current campaign of the 737-8 and 737-9 vs the A321neo. The customer has a split fleet of 737s and A320/321s. We’re reliably told Boeing’s offer for the 8 MAX is around $38m. The offer for the 9 MAX is around $41m. Airbus’ offer for the A321neo is the upper $40m range, arguing it has more seats and more range than the 9 MAX. The customer wants Airbus to price the airplane at $41m, the same as the less capable 9 MAX.
Normal pricing is well into the $40m range for the 8 MAX and into the $50m range for the 9 MAX and A321.
Sale-leasebacks also have been repriced in the pandemic environment. LNA is aware of one deal that was initially priced at $52m to $55m for A321neos. The lease rate was 0.61%.
When the deal fell apart, it was repriced at $44m with another lessor. The lease rate was not repriced off the failed deal. The lease rate factor became 0.72%. This indicates the pressure the airline was under to finance the airplanes.
Boeing faces another issue, not normally part of transactions.
It has, as we all know, more than 450 MAXes that were produced in 2019 following the grounding of the global fleet. Aviation Week previously estimated about 62 of these became white tails as customers went out of business or cancellations came through. One estimate concluds the number could go as high as 200.
These 62 airplanes are configured for the original customer. Configuration is more than just installing seats. Lavatory and galley locations may be different. Overhead bin features and in-flight entertainment systems may differ.
Reselling these airplanes almost certainly requires reconfiguring them. A typical cost is $5m-$7m. Who’s going to pay this?
Customers clearly will say Boeing needs to bear this cost, which should not be passed through to the airline in the price of the airplane.
Pricing a 737-8 at $38m compares with the list price of $121.6m. This equals a discount of about 69%. The $41m offer price of the 737-9 compares with a list price of $128.9m, or a discount of about 68%.
Airbus stopped publishing list prices after 2018. Based on the 2018 list and factoring in historical 3% hikes in each of 2019 and 2020, the $41m price the customer wants equals a 70% discount. The price Airbus wants represents a discount of 65%.
With the discounts Boeing will be forced to make under the present distressed circumstances, can it make money on the 737?
Our answer is yes, even if Boeing must absorb the reconfiguration costs. Leeham Co., our consulting arm, calculates the all-in production cost for the 737 (as well as other aircraft at Boeing, Airbus and other OEMs). We won’t reveal these numbers (after all, that’s what our consulting side gets paid for). But we can comfortably say Boeing will make money. The margin gets squeezed.
The one caveat: how much overhead gets allocated to the MAX. This is the real card between profit and loss.