Firstly a special thank you to the sponsors, speakers and attendees of the Airline Economics Finance & Investing in 777 Aircraft Day held in London today. It was a very well supported event with excellent discussions on stage.
There is no doubt that 777 values and lease rates are causing extreme concern for all those who have invested in the type. The soft 777 market seen in 2015, is all agree, most likely to get worse in 2016 as more 777 types are returned off lease or, if lease extensions are made, then it is highly likely that airlines will use the current circumstances to beat down the rates and as such the downward trends on values would be compounded.
Some lessors have had 777 aircraft types sitting in storage now for a long time at great cost and for some the only logical move is to heavily write-down the aircraft and get them moving again. Many at the event agreed that the situation has been partially brought about by the OEMs competing against lessors/remarketers by offering new/used aircraft at much lower rates to airlines. This has led to a situation where most of the airlines that would have taken mid-life 777s in the past are now taking new aircraft instead because the deals offered have been so exceptional, thus a swathe of the mid-life marketplace has been erased.
Maybe we should have all seen this coming. The DC10/MD11 for example was rescued by FedEx. It could also be argued that the 737-700 rates were saved by Southwest. But there is no such white knight operator in today’s market for the 777 Family. The 777-300ER will see softer market conditions that could affect investors far worse than the -200. Those investors that have not experienced a full cycle in this industry would not have expected the current situation and as it is these very people, which have taken so long for us all to encourage into investing in the aviation space, that are now starting to become very worried indeed about aircraft investment and it is likely that this will filter through to listed lessors that have widebody aircraft fleets in 2016.
Now at this point some might state that this is all very one sided, what about softening of Airbus aircraft and other types in the market? But this is a deflection from the subject matter in hand. Competing aircraft have their own problems, yes, but we are talking about the 777 specifically today, which has held a monopoly for many years and price points that reflected this. Now, due to new aircraft both coming into production and being delivered, this monopoly is eroded and thus from this alone a correction on price and lease rates is underway.
There are options out there though to give great heart. Today AFI-KLM E&M confirmed that they can reduce 777 configuration costs down from an average of €12m to €1m and reduce lead times from 18 months to three months simply by not relying on new seats but by refurbishing old seats and by replacing IFE systems with Wi-Fi based ones. The latter requires certification procedures, sure, but this is a formality and the weight saving and the way that passengers are using their own devises confirms that this is the way to go for mid-life aircraft transitions. LCF conversions showed that a 777 conversion is possible by fitting a lift between the two decks and using the existing cargo doors, the lift is transferable between various Airbus types also. This allows a 777 to be converted into combi or full freighter types, the cost is around $5m for this.
But the reality is that filling a 777 involves filling the existing cargo holds just as much as the passenger deck and there are very few airlines that can do this. And there isn’t any airline remaining that can do this which is not already operating the 777 and/or has next generation aircraft already on order. Outside of this group there is zero appetite for such a costly large aircraft. This leaves this group of airlines in a very advantageous position indeed, they know (and are) that they can all but name their price.
Rolls-Royce also reiterated its commitment to begin to open-up the marketplace across all of their engine types – something that many people overlooked in October when it was announced and that will start to help the 777-200 and other aircraft.
Some may think that I am being biased against Boeing – there is no basis to this. If Airbus were leaving such a footprint of devastation in the mid-life marketplace then we would be lambasting them right now, you can be sure of that, but unlike Boeing, Airbus stepped-up to the plate two years ago to help the market for mid-life A340s. Boeing was of course invited to participate to put forward their point of view and indeed lead the debate today, but they declined to do so.
Lessors and traders would do well to come together and jointly market aircraft to the likes of Delta to build the number of aircraft offered into something the airline can really think about. But this is an unlikely solution.
See the full write-up of the day and of the recent Rolls-Royce announcement in Airline Economics Issue 29 out later this month.