Jetrader - Spring 2018 - 61

Ben Chapman
ISTAT Certified Appraiser
UK Valuations Manager
Flight Ascend Consultancy
Tel: 44-20-7911-1762
ben.chapman@ascendworldwide.com
www.ascendworldwide.com

Background
The Boeing 737 MAX 8 is a re-engined derivation of the 737 (NG) 800 series, powered
by a single-source engine - the 69-inch
fan CFM LEAP-1B in a family program, which
composes the 7, 8, 9 and 10 variants to
replace the 700, 800 and 900 737 (NG)
series. With the new engine type on similar
sized airframes, split-tip winglets, reshaped
tailcone and interior reconfigurations, the
purpose of the MAX is to provide fuel burn
and seat-cost efficiencies. Thus far, it is
proving to be successful in this with fuel
burn savings currently shown to be around
14 percent. Maintenance intervals on airframe items have also been lengthened
while CFM is targeting like-for-like lifecycle
costs on the LEAP-1B as compared with its
predecessor the CFM56-7B.
Boeing's choice of the LEAP-1B over a
PW1100 option does not mean Boeing has
avoided all entry to service issues. As some
GTF-powered NEOs have seen, durability
issues and supply chain delays with the
CFM engine have caused delays, but these
haven't impacted the long-term success of
the program.
The MAX 8 is the most successful variant of the family by a good margin. At the
time of writing, Flight Fleets Analyzer was
reporting 46 in service with 2,279 on firm
order with more than 56 operators. This is
more than five times that of the 737-800
at this point in that program, highlighting the real depth to the expected size of
the fleet size and operator base. However,
this backlog is just over 60 percent of the
Current Market
Lease Rate

Year of
Build

Date of
Valuation
2017
2018
2019
2020
2021
2022

Current
Market Value,
"Full-Life"

Friday, 1 December 2017
0.37

A320neo. The NEO also continues to take
in a higher firm order volume in 2017 than
the MAX with 449 compared to 165. On the
face of it the NEO appears to be performing
better. So, while 737-800 enjoyed periods
of better market value retention and higher
lease rates than the A320ceo for a few reasons, can we expect the same from the MAX?
When considering engine options, Boeing
has minimized the fragmentation of the
MAX 8 fleet with the single-source engine
of CFM. While nearly 39 percent of the NEO
backlog have an engine choice yet to be
announced - a choice between either the
LEAP-1A or Pratt & Whitney's PW1100G -
it's unlikely the orders for either of these
options will overtake the orders of the
LEAP-1B powered MAX 8 comfortably. This
gives the MAX 8 a strong chance to have
the largest common engine fleet and the
associated higher liquidity.
Looking at the composition of the backlog
for signs of value risk, we see the NEO with
high fleet concentration in Asian carriers,
as well as higher concentrations with lessors and operators, primarily driven again by
the separation of the fleet into two engine
options. That said, operator backlog concentration (measured by the HH index) of

49.28

BOEING

Boeing 737 MAX 8

423 in the MAX 8 compared with 290 in the
A320neo, when calculated across all engine
options, demonstrates healthy levels of
liquidity, and we currently don't differentiate
between the options in terms of value. Along
with both products being at the beginning
of their production runs, these elements
combined mean that we currently apply equal
ratings for depreciation and forecasted value
volatility to the 737 MAX 8 and the A320neo.
As early production aircraft with long
expected economic useful lives when compared with the 737(NG)-800, the MAX 8 is
an attractive asset in a highly competitive
leasing market. Increasing competitiveness between the existing lessors in this
space - along with a relatively muted but
more positive long-term oil price outlook -
implies that we may not have seen the end
of the declines, although they are more
likely to be driven by an overheated leasing
market than erosion in the value associated
with the MAX 8. This is due to a changing
macroeconomic landscape from which it
was fundamentally designed.

Current and Future Base Values, USDM, "Full-Life", 2% Inflation
2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

50.59

49.02
51.13

47.77
49.59
51.68

46.79
48.36
50.14
52.23

43.98
47.42
48.93
50.71
52.79

41.37
44.58
47.99
49.50
51.27
53.36

38.97
41.96
45.09
48.56
50.09
51.85

36.75
39.53
42.42
45.61
49.15
50.68

34.70
37.29
39.95
42.88
46.14
49.75

32.81
35.22
37.67
40.37
43.36
46.67

31.07
33.31
35.57
38.05
40.80
43.85

Jetrader * Spring 2018 61
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Jetrader - Spring 2018

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