Jetrader - September/October 2010 - 25

Committing too early to a new aircraft type that eventually will never become a liquid financeable asset can be problematic, despite launch customer concessions and consequently attractive price levels.

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Moving away from the credit elements we discussed in the July/August issue of Jetrader, we’ll now review how a financier looks at a commercial jet as a security for a finance facility. Several years ago DVB Bank developed its own proprietary assetrating system. Nowadays similar rating services are available from a number of the appraisers. The DVB system splits the various airframe/engine combinations in four categories ranging from “A: very suitable for asset-based financing” to “D: unsuitable for asset-based financing.” Aircraft/engine combinations are not evaluated in terms of payload/range or other operational characteristics but purely from the point of view of a financier’s key criteria: value stability and market liquidity. Determining factors for a high rating obviously include a well-diversified user base, absence of major fleet concentrations with weaker carriers, a significant backlog, young technology age, etc.

Considerations with New Aircraft
A successful aircraft type will generally move through the four asset categories during its technology life cycle. When launched, a new aircraft type will have to achieve sufficient market acceptance in terms of orders and operator base before it can move up in the ranking. In addition, a new aircraft will almost by definition initially have a higher technology risk compared to proven competitors—not only in terms of being capable of safely completing its mission, but also in terms of probability of major improvements early in the life of the program. There are plenty of examples of aircraft where the initial version later was nicknamed “lead sled” or similar. Examples include the early L1011s, A320-100, “light-wing” 747-400s, early low MTOW A330-300s, etc. Unfortunately it looks like even today the tradition of the lead sleds continues with even the most advanced aircraft types. Sometimes new aircraft types or versions never reach the “A” status. The career path of an aircraft type is not

always easy to predict. As an example, while the Boeing 737-500 was fairly successful, the B737-600 and A318 never became suitable assets for purely assetbased financing. Not only “shrunk” aircraft can disappoint. Stretches like the B757-300 and B767-400ER did not make it to the top either. Selecting the right aircraft is key for an airline, a leasing company and a financier. Committing too early to a new aircraft type that eventually will never become a liquid financeable asset can be problematic, despite launch customer concessions and consequently attractive price levels. The mirror image of this can be as damaging. Committing to an aging aircraft type that will be pushed out of the market by new technology may also have devastating effects on the loan-to-value curve. History has shown that “last of the line” aircraft generally display a very poor value performance. For a financier, newer does not always mean better; a five-year-old, mid-production aircraft may show better value retention characteristics compared to a new, lateproduction sample of the same type.

The A320 – B737NG Situation
Although by the time this article will be printed a lot more may have become clear, one of the main dilemmas facing aircraft investors and financiers alike is the future of the all-important replacement of the A320 and B737NG families. While the real replacement aircraft (an open-rotor powered, twin-aisle lifting body?) seems to have been pushed to 2020 or even later, the potential launch of a re-engined version of the A320 and/or B737NG will have a major impact on the airfinance market. During the A320/B737NG era, the market was in a nice equilibrium as both types were arguably equally competitive. This may change now, assuming that the A320 may be more suitable for a simple reengining (the so-called “NEO” new engine option), while Boeing may decide to go for a more drastic redesign of the 737NG. Whatever happens, the market symmetry

of the A320 – B737NG situation is gone, and this may very well result in a more rapid succession of narrow-body types. Even excluding CSeries, MS-21 and C919, it is not unthinkable that the launch of the A320 NEO for EIS around 2016 will be followed by a rewinged 737 NEO aimed at EIS in maybe 2018 and subsequently an all-new A320 successor early in the next decade. A rapid succession of types and variants will most likely not be too beneficial for aircraft values, and it is not unthinkable that the lack of enthusiasm from the financial community (lessors and financiers) for interim solutions may make the OEMs think twice about their product strategy. On the other hand, airline demand for fuel-efficient aircraft is high, and from a PR perspective, can commercial aviation afford to ignore these new, fuel-saving technologies for 10 years or longer? So, based on the above, are there any implications for values of hypothetical “last of the line” A320s and 737NGs? It may be argued that it will take a long time for the current A320 and 737NG fleets to be replaced and that consequently these types will remain in demand and not suffer too much loss of value in the coming decade. One may also argue that the lower operating costs of the re-engined planes will offer their operators a significant cost advantage. For “classic” equipment, the only way to remain competitive will be the lowering of capital costs, i.e. lower values. Experience seems to indicate that old technology aircraft will only suffer a limited loss of value (vs. a normalized depreciation pattern) during the first industry downturn after launch of the replacement generation. During the second downturn however, the loss in value may be significant and values may only recover partly. For an asset-based financier, it is important to recognize when it is time to change policy. Staying with aging technology too long (although as such new built aircraft) may result in a rude wakeup call. Some financiers were surprised by Jetrader 25



Table of Contents for the Digital Edition of Jetrader - September/October 2010

Jetrader - September/October 2010
A Message from the President
Contents
Calendar/New
Q&A: Dr. Alan Epstein
Commercial Outlook is Up as Economies Rebound
Crisis, What Crisis?
The Big Question
Funding Fundamentals
Is That a Lawsuit in Your Luggage?
AFRA Sets Ambitious Challenge for Aircraft Recycling Sector
Road to Recovery
Remembering Hafthor Hafsteinsson
License to Fly
Aircraft Appraisals
From the ISTAT Foundation
Aviation History
Advertiser.com/Advertiser Index
Jetrader - September/October 2010 - Jetrader - September/October 2010
Jetrader - September/October 2010 - Cover2
Jetrader - September/October 2010 - A Message from the President
Jetrader - September/October 2010 - 4
Jetrader - September/October 2010 - Contents
Jetrader - September/October 2010 - 6
Jetrader - September/October 2010 - Calendar/New
Jetrader - September/October 2010 - 8
Jetrader - September/October 2010 - Q&A: Dr. Alan Epstein
Jetrader - September/October 2010 - 10
Jetrader - September/October 2010 - 11
Jetrader - September/October 2010 - Commercial Outlook is Up as Economies Rebound
Jetrader - September/October 2010 - 13
Jetrader - September/October 2010 - 14
Jetrader - September/October 2010 - 15
Jetrader - September/October 2010 - Crisis, What Crisis?
Jetrader - September/October 2010 - 17
Jetrader - September/October 2010 - 18
Jetrader - September/October 2010 - 19
Jetrader - September/October 2010 - 20
Jetrader - September/October 2010 - The Big Question
Jetrader - September/October 2010 - 22
Jetrader - September/October 2010 - 23
Jetrader - September/October 2010 - Funding Fundamentals
Jetrader - September/October 2010 - 25
Jetrader - September/October 2010 - 26
Jetrader - September/October 2010 - 27
Jetrader - September/October 2010 - 28
Jetrader - September/October 2010 - Is That a Lawsuit in Your Luggage?
Jetrader - September/October 2010 - 30
Jetrader - September/October 2010 - 31
Jetrader - September/October 2010 - AFRA Sets Ambitious Challenge for Aircraft Recycling Sector
Jetrader - September/October 2010 - 33
Jetrader - September/October 2010 - 34
Jetrader - September/October 2010 - 35
Jetrader - September/October 2010 - Road to Recovery
Jetrader - September/October 2010 - 37
Jetrader - September/October 2010 - 38
Jetrader - September/October 2010 - Remembering Hafthor Hafsteinsson
Jetrader - September/October 2010 - 40
Jetrader - September/October 2010 - 41
Jetrader - September/October 2010 - 42
Jetrader - September/October 2010 - License to Fly
Jetrader - September/October 2010 - 44
Jetrader - September/October 2010 - Aircraft Appraisals
Jetrader - September/October 2010 - 46
Jetrader - September/October 2010 - From the ISTAT Foundation
Jetrader - September/October 2010 - Aviation History
Jetrader - September/October 2010 - 49
Jetrader - September/October 2010 - Advertiser.com/Advertiser Index
Jetrader - September/October 2010 - Cover3
Jetrader - September/October 2010 - Cover4
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