Boeing, Airbus

Booming Demand for Used Airliners

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There are currently six times as many secon-hand Boeing 777 airplanes on the market as a year ago.
  • Why it matters

    Why it matters

    The production boom at Boeing and Airbus, underway for several years, is creating a glut of used airplanes, with far-reaching consequences.

  • Facts

    Facts

    • The CEO of Delta Airlines recently acquired a used Boeing 777 for $7.7 million.
    • The financial troubles of Malaysia Airlines and Transaero have suddenly led to the availability of older Boeing 777s.
    • The oversupply of used aircraft has prompted Airbus to produce fewer of its popular A330 models.
  • Audio

    Audio

  • Pdf

Richard Anderson knows how to apply pressure. The chief executive of the U.S. carrier Delta noted recently that he wasn’t willing to pay more than $10 million, or €9.2 million, for a 10-year-old Boeing 777-200.

“We can buy those airplanes and take parts off of them even if we don’t end up flying them,” he said.

But some question whether an airplane for which airlines paid an average of €200 million should be sold for parts after only 10 years of service.

Mr. Anderson’s statement caused a stir in the aviation industry. Boeing promptly countered that the 777 holds its value relatively well, and that the aircraft should still be worth more than $50 million after several years of deployment. But the Delta chief executive isn’t backing down. Three days ago, Mr. Anderson tweeted that he had acquired a used 777 for only $7.7 million. He didn’t mention how old the plane was.

The case shows that the market for used airliners is under pressure. The production boom at Boeing and Airbus, underway for several years, is creating a glut of used airplanes. The risk of an oversupply is growing, with far-reaching consequences.

“We can buy those airplanes and take parts off of them even if we don’t end up flying them.”

Richard Anderson, Chief Executive of Delta Airlines

If the residual value of aircraft declines, it will wreak havoc on the financing plans of airlines and aircraft financiers alike. They budget with specific resale prices and leasing rates when airplanes change owners. This usually happens for the first time after 10 years of operation. In addition, their calculations are based on a 25-year average operating life for an airplane. Moving them to the bargain shelf after only 10 years would be a paradigm shift.

A few carriers have begun reacting to the development. Airlines normally depreciate their airplanes over a period of about 20 years, to a residual value of 10 to 15 percent. Lufthansa recently reduced this residual value to 5 percent, citing “faster technological development.”

Leasing companies are also affected, as the profits of funds that provide financing depend primarily on the value of the aircraft. “We keep a close eye on the market for used airplanes, because excess capacity can always occur,” said Anselm Gehling, head of the Dr. Peters Group, a leasing company.

But Mr. Gehling cautions against panic. “We aren’t seeing this sort of excess capacity at the moment,” he said. “There is a tremendous backlog among U.S. airlines, for example, because some of the aircraft in their fleets are old.”

Leasing specialist Doric Asset Management is also doing its best to allay fears, noting that there is plenty of demand to offset the current supply of used airplanes. “Because of the financial difficulties of Malaysia Airlines and Transaero, older Boeing 777s are available unexpectedly,” a Doric spokeswoman said. “Operators like Delta Airlines, which have no problem using used aircraft, are taking advantage of this to exert a certain amount of pricing pressure.”

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Demand for the Airbus A380 has taken off. Source: Sven Hoppe/DPA

 

But manufacturers are not as sanguine. The prospect of good deals on used aircraft also creates pressure on the sale of new planes in the medium term. This is especially true of models for which manufacturers have already announced a successor model. For instance, Boeing is working diligently on the 777x. The aviation market is not unlike the auto market, in that aircraft buyers tend to wait for new models to come out before making their purchase decisions.

This is the case with Airbus’s A330 long-haul aircraft, which will be replaced by the A350. Airbus has not noticed any decline in interest in the A330 yet. “The A330 is still the top-selling wide body aircraft this year,” a spokeswoman for the company said.

But according to a study by Deutsche Bank, there are now 46 unused A330-200s on the market, three times as many as a year ago. In the case of the Boeing 777-200ER, there are six times as many unused planes on the market as a year ago.

This has registered with Airbus in Toulouse, France. “We have recognized that it is necessary to create a balance between delivery and demand, and between new and used aircraft,” a spokeswoman said.

That, she explained, is the reason why Airbus will reduce the rate of production of the A330 from 10 to six aircraft per month starting in the first quarter of 2016, “to reduce the pricing pressure for new airplanes and leave enough space for the placement of used planes.”

“The first used A380s create a real opportunity for those operators who have hesitated with the A380 until now.”

Maurick Groeneveld, Aircraft Management Director

The first used Airbus A380 superjumbos will probably come on the market in 2017, after 10 years of service at Singapore Airlines, although the airline hasn’t yet decided whether to keep the aircraft. It is clear, however, that Singapore Airlines will have to reach a decision next year. NordLB Research has calculated that the leasing agreements on 11 A380s will expire by 2020 alone.

How much is one of these used giants worth? No one knows. But there are estimates, such as the one by Mr. Gehling, whose company owns four of Singapore’s five A380s. “The four engines alone, which, by contract, must be refurbished when returned, can certainly be valued at $70-80 million, so that the entire aircraft is likely to fetch $90-120 million,” he said.

Precisely because of the refurbishment costs, Mr. Gehling believes there’s a good chance Singapore will keep one or two of the aircraft. Maybe that’s a good move, because experts are divided over how quickly the planes could be sold. Skeptics point out that the A380 model hasn’t been selling for the last two years, partly because the trend is toward direct connections with small wide body aircraft like the A350.

Besides, Airbus has already held out the prospect of a successor model, the A380 neo, although it is unlikely to be introduced before mid-2020, if at all. One NordLB expert also believes there is another obstacle to the marketing of used A380s: “What all the A380s have in common, in terms of re-marketing, is that they usually come with a very elaborate cabin, with retrofitting costs of about $20-30 million,” he said.

 

Second-hand market for A380-01

 

But Maurick Groeneveld, aircraft management director at Doric, which owns one of Singapore’s A380s, is optimistic. “The first used A380s create a real opportunity for those operators who have hesitated with the A380 until now,” he said, adding that that leasing rates for the super jumbo are comparable with those of smaller wide body aircraft. He also pointed out that the number of airports with facilities to handle the A380 will continue to grow.

In a two-class configuration for economy and premium economy, the A380 offers 600 to 800 seats, according to Mr. Gehling. “This is very attractive, not least for low-cost providers in Asia,” he said, pointing out that Turkish Airlines has repeatedly considered adding the double-decker aircraft to its fleet. “I think Turkish will decide once the new airport in Istanbul is completed, as scheduled, in 2017.”

But that alone is not enough. Airbus has set up a service program to support airlines with the introduction of the A380, from personnel training to retrofitting and maintenance.

This is an important step, because the one thing that has deterred potential buyers of the A380 so far is the aircraft’s reputation of only fitting into the fleets of especially exclusive airlines. This perception is wrong, said Mr. Groeneveld, but understandable. “It’s because a few A380 were equipped with luxury features like a shower and a bar,” he noted, adding that this hasn’t exactly helped to market the aircraft.

 

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Jens Koenen covers the aviation and space industry for Handelsblatt. To contact the author: koenen@handelsblatt.com

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