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The current state of aircraft remarketing

Written by  Mary-Anne Baldwin Tuesday, 21 August 2012 10:21

While ECA and Ex-Im funding has allowed more airlines to purchase new-build aircraft, new rules under Basel III and the ASU will stem this funding, meaning the market for used aircraft is likely to pick up again. Tony Whitty, CEO of Cabot Aviation, discusses.

The value of used aircraft depends on three main factors: The type of aircraft; its age; and how much the owner is willing to sell it for. Age affects availability, as does the cost of transitioning the aircraft from one operator to another. Many of the older aircraft types are worth only a few hundred thousand dollars in scrap value as they are too expensive to operate and are being phased out by more popular, more fuel efficient aircraft. These types include older or converted 747-200s and 737-200 passenger aircraft; MD80s, DC10s, 727s and A300. When these aircraft have little remaining green time – that is the time or cycles remaining until the next heavy maintenance check – it is likely that no more money will be invested, and the aircraft will be retired to the desert. 

However, the availability of newer replacement aircraft is lower than at any time in the last three years, as is shown in the table (right). This is encouraging for those in the remarketing sector. 

Narrowbodies

The market for narrowbody aircraft varies significantly across different aircraft types. American Airlines is expected to ground dozens of MD80s, which would lead values to fall so low that they could no longer be sold at reasonable rates. There are already many parked and time-expired airframes worth $60,000 or less. However, engines with time remaining may sell for a few hundred thousand dollars as operators like Allegiant Air still see value in the type due to its low capital cost. Additionally, if demand for the aircraft falls, it is not too costly to park it. 

Both the 737-300 and 737-400 still trade in large numbers, but the 737-500 is harder to place as the aircraft type has similar operating costs but fewer seats, meaning a higher cost per available seat mile (CASM). The 737-300 is still a workhorse for many airlines, particularly those in remote locations. It is the aircraft of choice, namely because there is a large supply of engineering support, pilots and spares.

Cabot recently sold two 737-300s now flown in the Congo under wet lease from Privatair. Lessors continue to place 737s on lease but cash buyers are emerging in jurisdictions in which lessors are wary of entering. Usually it is an airline backed by local and prominent businessmen. These airlines typically see no value in paying lease rates of around $70,000 to $100,000 per month when they can acquire an aircraft outright for $4m to $6m.

Screen shot 2012-08-21 at 10.33.40

Demand for 737NGs continues to be high. Only 12 are advertised for sale or lease with availability dates spread right through 2012 (although not all major lessors advertise coming availability). Lease rates have remained steady and Cabot notes that some airlines have even incurred higher than average rates on the 737-800 due to competition. 

Cash sales are uncommon mainly due to lessors’ high book values and their reluctance to sell an aircraft type that is still in demand with its customers. Part-out values for the 737NGs are high, including the 737-600.

The market for Airbus aircraft has weakened over the last year. A steady number of A318s, A319s and A320s are being bought for scrap, some of which are less than 10-years-old. In particular, the V2500-A1-powered A320 has suffered as many of the original operators –such as Air India, TAM, Mexicana and Cyprus Airways – phased out the aircraft at the same time. Many of these early-build aircraft are now more than 20-years-old, meaning they are too old to sell in many countries due to regulations on imported aircraft. For example, China will not allow aircraft over 10-years-old to be imported; India has a limit at 15-years-old; Indonesia 20, and Nigeria 22. 

In total there are more than 40 countries with age restrictions, each of which restricts the ability to sell older aircraft as operators can lease younger aircraft at low lease rates.

The availability of Airbus narrowbodies has grown significantly. There are 16 A319s and 25 A320s for sale or lease. The demise of Spanair and Kingfisher’s lack of finance have not helped. One of the biggest issues is the volume of aircraft that have been ordered and lessors are struggling to place the five- to 10-year-old aircraft that are replaced by the new deliveries. As a result, 10-year-old A320s with an excellent pedigree and technical status are leasing for $160,000. For most lessors, this represents a lease rate factor well below one per cent based on their book value. 

A further issue regarding the Airbus market is that the aircraft are equipped with engines from IAE and CFM. Unlike the 737, the market for used Airbus aircraft is split. The opportunities are significantly reduced as few operators will take both engine types. In the current market, with high availability, they do not need to.

With recent experience of selling two 757-200s, Cabot notes that the 757 market remains very strong. For certain charter markets, there is simply no replacement; it is the only aircraft that can fly non-stop for six hours or more with 200 or more passengers. Coupled with huge demand for 757 freighters from Fedex, TNT and DHL, the aircraft is good to have on one’s books.

Widebodies

There is limited availability for both 777s and A330s; there are currently no used 777s advertised for sale and there are just three A330s. Reports in the press indicate that Transaero are buying more 777s from Singapore Air and there was a queue of operators eager to buy Egyptair’s aircraft, which were eventually retained by the carrier. In the meantime, the availability of 767-300ERs increases. 

Lease rates for aircraft built in the early 1990s are currently about $230,000 per month and range up to $290,000 for those built in the late 1990s. Cargo conversion for 767-300ERs has been slow with Guggenheim and euroAtlantic converting just one each.

The A300-600 market has had a revival with DHL taking 18 ex-JAL aircraft and Maximus Air Cargo also converting three. There is still a sizeable feedstock of the aircraft to come out of the Asian market.

Like the market for the older A320, many operators retired A340s at the same time – namely Cathay Pacific, South African Airways, Olympic Air and Gulf Air – and there will be more to come from the likes of IAG, Royal Jordanian and Emirates. Some carriers, such as Aerolineas Argentinas, have taken advantage of the weak market by adding several aircraft, but the bulk of activity has included sales for scrap with Apollo being a prominent player in this market. 

While it will be difficult to place all the available aircraft, there could still be niche opportunities, either with airlines that do not have ETOPs or with charter operators that want to carry 300 passengers further than the 767 can fly. With 300 or more passengers and low acquisition costs, it compares very well with the 747-400.

Lastly, there are the 747-400 and A380s. The 747 is too large for the services most airlines offer, though this excludes large flag carriers such as Singapore Airlines, Cathay Pacific, Emirates and Delta. For example, fifteen years ago, a host of African carriers such Air Namibia, Air Madagascar and Royal Air Maroc, each operated 747s. Today these carriers want 777s or A330s due to the aircraft’s lower operating costs and the right seat capacity for daily services into Europe, the Middle East, the US or Asia. 

There are small niche markets like the Hajj and Umrah, both in Saudi Arabia, where the 747 is ideal, but these operations do not give year-round utilisation, which means there are few operators that can keep 747s for the long-term. A reasonable number of 747s get converted and a similar number get scrapped. 

In summary, there are cash buyers for most aircraft types but few opportunities exist in Europe or North America unless one is selling for part-out or freight conversion. During the last 12 months, Cabot has transacted cash sales of aircraft in Angola, Nigeria, Iceland, Guyana, Indonesia, South Africa and Singapore. These regions plus Australia, eastern Europe, the west coast of Africa and the Middle East offer the best prospects. 

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