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ASCEND: RETENTION AND VOLATILITY OF AIRCRAFT VALUES VEDDER PRICE: US EX-IM’S RESPONSE TO THE DOWNTURN IBA GROUP: UNDERSTANDING ENGINES AS ASSETS BOEING: THE CHANGING FACE OF AIRCRAFT FINANCING
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While Europe had already entered the market with Mercure. In the early 1980s McDonnell Douglas was the ﬁrst to adapt the DC-9 to the higher fuel cost environment and the upcoming Stage III noise-regulations by stretching the DC-9 AIRCRAFT FINANCE GUIDE 2011 and made its ﬁrst ﬂight in 1987. the A320 family possesses most of the characteristics believed to make an aircraft ideal for asset based financing purposes. For most asset based lenders.AIRCRAFT FINANCE GUIDE Financing the A320 Family Since the recent credit crunch. there are a few black sheep among the group. Traditionally though. Bert van Leeuwen. Caravelle. great market liquidity and a stable. the US had dominated with the JT8D powered Douglas DC-9 and 727 and 737 Families. there are over 4000 aircraft in the global ﬂeet and over 2300 more on order. 36 . the term is used to describe transactions involving credits or aircraft that are considered a safe investment. the A320 Family comes close to being a no-brainer aircraft type. the term ‘no-brainer’ is often associated with bankers rather than anything else.to. the A320 was the first product in the short. versatility. and BAC One-Eleven. promising the bank a trouble-free transaction. Flying for over 300 operators. head of aviation research at DVB bank discusses the pros and cons of ﬁnancing the A320 Family aircraft. Trident. Today.medium haul single aisle jet market. T HE A320 WAS LAUNCHED OVER 20 years ago in 1984 HISTORY For the European Airbus consortium. long value history. Although the majority of A320 family aircraft have proven well suited to asset based transactions as with any family.
it took more effort to find customers outside of Europe and with the bankruptcies of early North American A320 customers (including Pan American and Braniff) a number of early A320s were parked in the Arizona desert. Sticking 37 . While some of the European flag carriers where ‘natural’ launch customers for the A320. -400 and -500). clean. Boeing responded with a stretched and modernised version of the 737-200. Eventually North America and the rest of the world warmed to the A320 and Boeing was forced to modernise its narrowbody offering. Initially only powered by the -5A derivative of the CFM56 engine. These plans eventually took the form of a truly high tech aircraft featuring among other things. the Series -200. called the -300. side-stick controllers and containerised belly cargo space. designated A320 made its ﬁrst ﬂight in early 1987. AIRCRAFT FINANCE GUIDE 2011 revolutionary ﬂy-by-wire technology.AIRCRAFT FINANCE GUIDE and re-engining this DC-9 Super 80 (later renamed MD-80) with an improved version of the JT8D engine. the ﬁrst Airbus narrowbody. The 737-300 was the ﬁrst of the 737 generation now known as the Classics (-300. quiet. and fuel-efﬁcient GE/SNECMA CFM56-3 engine. One of the major contributing factors to the success of the 737 Classic was its new. Airbus planned an attack on the American manufacturers dominating the single aisle market. While the 737 Classic was slowly gaining market share compared to the MD80.
JetBlue introduced the low-cost carrier (LCC) market to the A320 – a market segment that was traditionally dominated by Boeing’s 737. as 38 well as strategic and political reasons. However. until recently it looked like the obsolescence risk for the A320 and the 737NG was very low.AIRCRAFT FINANCE GUIDE to the familiar 737 designation and other typical Boeing narrowbody characteristics. this stability has provided a strong stimulus to commit funds as. in 1997 Boeing introduced the 737 Next Generation (NG). things may change. the A320 family aircraft can be found on all continents. With the new order intake almost exploding just before the outbreak of the downturn.and Asia. For ﬁnanciers as well as investors. flown by operators with business models from corporate Jet to LCC.produced aircraft. ﬁnal assembly of the A320 Family was expanded from the traditional factories in Toulouse and Hamburg to a third line in Tianjin (China). largely because Southwest Airlines (the role model for all LCC’s) was a dedicated 737 operator. For this. In 1999. and from leisure charter to scheduled network. Although both manufacturers had victories in the battle for market share. AIRCRAFT FINANCE GUIDE 2011 . hence there should not be any difference in the ability to finance these aircraft. one win for Airbus proved a breakthrough in an increasingly important market segment. Today. The Tianjin factory is reportedly a copy of the Hamburg plant and Airbus has assured all interested parties there will be no difference between Europe. After the 737NG was launched to match the A320 the 150-seater narrowbody market enjoyed a balanced duopoly – neither of the types were able to claim a decisive market advantage over the other. Airbus claimed production capacity was their main challenge.
The A318 was aimed at operators with a small requirement for 100-seat aircraft but a desire to maintain ﬂeet commonality. A marginal aircraft from the start.73 m. the A320-200 was proposed. the A320-200 has a wider choice of engines compared to the 737NG. wing fuel tanks only and A320 FAMILY MEMBERS AND THEIR OPPONENTS The basic 150-seater A320-100 made its first flight in February 1987 but this version was quickly superseded by the more capable high maximum take-off weight (MTOW) -200 version. This can not be said for the A320-200. The type has never been seen as suitable for asset based ﬁnancing. In 1993. both at different thrust levels. featuring a 3. All 21 A320-100s built are equipped with CFM56-5A1 engines. most asset based ﬁnanciers are equally happy to ﬁnance the mainstream Airbus and Boeing products. most A320 versions face competition from some outsiders. Despite attempts from Toulouse and Seattle to demonstrate technical or commercial superiority. Airbus offered a choice between the International Aero Engines (P&W/RR/MTU/JAEC) V2500-A1/A5 series and the CFM International (GE/Snecma) CFM56-5A/5B series. and in June 1995. stretched version called the A321-100 made its ﬁrst ﬂight. Although they are not always a perfect match in terms of capacity. the A320-100s received 20 orders — only seven of which remain in operation. shorter fuselage compared to the A320.93 m. In 1997. 6. Both families have their own problem children (the 100-seaters). In addition. there are a few niche versions that differ enough from the popular mainstream aircraft to affect their suitability for ﬁnancing. and both have their superstars (the A320 and 737-800). Cockpit commonality has always been a major strength of the A320 family and a pilot can ﬂy all AIRCRAFT FINANCE GUIDE 2011 no wingtip fences. The short range A320-100 featured a low MTOW.AIRCRAFT FINANCE GUIDE the A320 family aircraft under the same type rating. Firstly. the fourth and ﬁnal family member made its ﬁrst ﬂight. Since the ﬁrst A320-100 Airbus has reﬁned and expanded its original single-aisle design. a 185 seat. the -100 was effectively superseded by the more capable A321-200. each A320 family member is effectively competing crew qualiﬁcation allows A320 pilots to ﬂy the in-production head-on with a matching member of the 737NG within roughly the 100-200 seat market segment. which from an asset based finance view point is close to perfection. neither Airbus nor Boeing can claim complete superiority in the narrowbody market. From a 39 . However. However. within the 2250 A320-200’s ﬂying today. Shortly after the launch of the A320-100. but it certainly requires a more in-depth analysis to distinguish between the more and the less suitable variants of both families. In 2002. Cross Airbus widebody models as well. While Boeing elected to offer only CFM56-7B engines (at different thrust levels). the A320 and A321 was given a sister in the form of the 124 seat A319-100. the 107 seat A318-100 ‘double shrink’.
0 Klb V2522-A5 to the 33 Klb V2533-A5. It should be noted that extreme thrust levels or MTOW’s (needed for a few market niches only) do not add much additional value.000 kg. the V2500 SelectOne upgraded new engine entered into commercial service with its launch customer. It seems a number of A5’s operated by airlines in India have started to developed stress-cracks in a section of the high pressure compressor. redesigned belly fairing etc. both engines each enjoy a substantial market base. a few versions seem less preferable. either for real reasons or as leverage in the negotiations. which includes changes to the high-pressure (HP) compressor.6 Klb (B8) to 33 Klb (B3). Staying with the engine selection. for a small group of A320s it is because of the airframe. New tech insert components can be installed at engine overhaul except for the combustor and tech insertion has ﬁnancing perspective. recently a small sub-ﬂeet of this engine type encountered a problem.). The A320-200 is available with MTOW’s ranging from 66. IAE also introduced an engine upgrade for their V2500-A5. In response. While the V2500-A5 has been performing well in general. there is no sharp distinction between early and late A320s. 2008. The DAC can be converted to normal single annular combustor (SAC) status by swapping the engine core however. For those engines that do not have any cracks. The ﬁrst generation CFM56-5A was succeeded by the -5B and later the -5B was improved with a new 3D Aero package. There is a trend that increasingly discriminates the older -5A powered aircraft as less desirable for ﬁnancing. Extra range can be obtained by adding one or two additional centre tanks (ACT) of 3000 litres each. and new engine control software. upgraded and lighter interiors as well as aerodynamic improvements (new pylon shape. Fortunately. More recent A320s feature product improvements such as LCD instead of CRT monitors in the cockpit. This group consists of a sub-fleet of A320s operated in India – the so-called ‘double bogies’. IAE has worked out a structural solution – the replacement of some parts. The V2500-A5 is available at various thrust settings. and low-pressure turbine nozzle. While IAE had its -A1. The upgrade includes high and low-pressure turbine improvements. contrasting them from the more modern -5B powered aircraft. an upgraded compressor. CFMI introduced a tech insert upgrade.AIRCRAFT FINANCE GUIDE STEP CHANGES IN TECHNOLOGY Engine technology has evolved since the A320-200’s first ﬂight over 23 ago. To lower the runway loads. The CFM-56-5B/P is available at various thrust settings. With the -A1 ﬂeet largely concentrated by two big operators in India and Mexico. The DAC was CFMI’s answer to the request from some Northern and Central European carriers for an ultra-clean engine to reduce environmental charges imposed by the local governments. It is thought unlikely that these aircraft will ever leave the Indian register. CFMI had its double annular combustor (DAC) as its somewhat stigmatised engine. Although the competition between the two engine consortia may result in a little more initial discounting. dubbed SelectOne. A bump version for hot and high airports is also offered on speciﬁc V2500 versions. This experience created a bad name for the DAC. it can be argued that the split of the A320 ﬂeet into CFMI and IAE powered aircraft is a negative factor. 40 now become the production standard. increase time on wing. While there is a clear difference between the 737 Classic and the 737NG.. it came at the expense of slightly higher operational costs. a special cleaning action is required. HP turbine. For the same reasons. IAE claims up to one per cent lower fuel burn and 20 per cent longer time on wing from the upgrade. AIRCRAFT FINANCE GUIDE 2011 . While most of the niche aircraft are so-called because of engine-related issues. The well-publicised problems with the initial IAE V2500-A1 negatively stigmatised this version despite successful attempts by IAE to improve the performance of the -A1 with the so-called Phoenix kit. Both CFMI and IAE continue to improve their products. Bankruptcies of the original operators released a number of DAC to the market and ﬁnanciers were confronted with negative reactions from potential new operators.000 to 78. While the DAC clearly met that requirement. the future of the -A1 powered ﬂeet is at best uncertain. hence the negative impact of the split is not too severe. On October 1. One differentiator that is used by financiers is to call CFM56-5A powered aircraft ‘A320 Classics’. this requires a signiﬁcant investment. most likely because of the interaction of certain chemicals in the local environment with certain metallic parts in the engines.500 kg. these aircraft are equipped with four-wheeled main landing gears as opposed to the standard two-wheel main gear bogies. combustor. Financiers generally prefer aircraft with higher thrust engines as the cost of an engine thrust upgrade during remarketing can be avoided and lower thrust settings do not require additional cash. also ranging from the 22. ﬁnanciers prefer higher MTOW variants. a new variable stator vane system. ranging from 21. None of these improvements has yet seriously affected the acceptability of the previous designs regarding ﬁnancing. A ‘bump’ version for ‘hot and high’ airports is also available. for remarketing purposes the A320 fleet is effectively divided into two. Once implemented it should not have any long-term impact on the value or ability to ﬁnance the aircraft. These have been designed to improve fuel burn and durability. with the basic MTOW 73. In mid2007. and give the engine more margin over CAEP 6 emissions levels.
For the time being our conclusion has to be that the A318 does not make a popular asset from a ﬁnancier’s point of view. While these appraised value figures are not the same as the net ﬂyaway prices paid by Airbus’ airline and lessor customers (a carefully kept secret). With new technology geared turbo fan (GTF) replacement technology on the horizon.000 kg. While initially there was a structural difference between the A321-100 and the A321-200. a shrink version and especially a double-shrink version suffers from an over-dimensioned heavy structure. Unfortunately. For an asset based ﬁnancier this is important to keep in mind. It must be said that the A320 was launched some years after the era of hyperinﬂation. The 737-600 suffers from the same problem. Should inﬂation increase signiﬁcantly in the coming year as a result of the billions of dollars injected in the global economy. The double-shrink A318 is the problem child of the A320 family in terms of market acceptance and the ability to remarket. all -100 aircraft are effectively low MTOW -200’s and a (paper) upgrade to -200 levels is possible. While the engines powering larger members of the family are obviously too heavy for the little A318. while Airbus and the engine OEM’s have improved their products signiﬁcantly over the last two decades. which makes the combination rather unique but at the same time. The operator base is split between CFM56 and V2500-A5 operators. With 100-110 seats.000 to 75. the main advantage the A318 had to offer was its commonality with the other family members. the A318 is effectively a competitor to the big regional jets. VALUES AND RISKS With its production history spanning over 20 years. The A321-200 features structural reinforcements. even a relatively young CFM56 powered A318 could not be sold for prices that exceed the break-up value of the aircraft. For transactions involving well-maintained. the 737900/900ER. With the A318 already a slow seller. which seldom results in an efficient aircraft. While the A321-100 has all characteristics of a niche aircraft. this could result in an upward trend for new aircraft prices as well. the CFM powered aircraft at least have another edge over the unfortunate PW6000.500 kg. it can still claim superiority over its (much younger) opponent. Up to two ACT’s are optional.000 to 68. The A319-100 is available with MTOW’s ranging from 64. and provisions for additional center tanks. Interestingly enough. The second most popular member of the family is a simple shrink from the baseline A320. So. it is our understanding that as of the manufacturer’s serial number (MSN) 633.500 kg. It should be taken into account that the above is not to be confused with the so-called escalation clauses in airline 41 . or rather the value of its engines. Last and least is the A318. without much of a clear upward or downward trend. While not as efﬁcient as the stretched super-regionals. The A318-100’s MTOW ranges from 56. asset based financiers prefer the more range-capable A321-200 to the A321-100 (of which only 81 were produced). from traditional network carriers to LCC’s and even corporate and private jet operators use the type.000 to 93. the ‘historic’ current market values (as reported by appraisal ﬁrm Ascend) have largely ﬂuctuated with the ups-and-downs of the market. albeit some of the older -5A powered aircraft may be ending up at second or third tier airlines as result of the current market downturn. unsuitable for asset-based ﬁnancing. the A320 is an ideal aircraft to track long-term aircraft value dynamics. and up to two ACT’s are optional. There are also a small number of DAC-powered A320s. The A318CJ corporate jet version does have a certain popularity in the corporate jet market. development problems AIRCRAFT FINANCE GUIDE 2011 for the PW6000 delayed introduction of that engine substantially and the CFM56 became the preferred engine for the A318. A wide range of operators. such as the E190 and E195 and to a lesser degree the CRJ900 and 1000. the price has stayed fairly ﬂat with ﬂuctuations largely driven by the condition of the market. standard specification A320s there seem to be few things that can go wrong — as long as realistic valuations and value projections are assumed.AIRCRAFT FINANCE GUIDE Like the A320. The A319 is well-suited to asset based ﬁnance. since the ﬁrst A320-200s were delivered in 1988. the A319 has relatively few problem variants..000 kg although some airlines are known to operate lower MTOW to beneﬁt from reduced landing and navigation charges. This is indicated by the almost horizontal trend-line in the value graph above. while airlines preferring an optimised power-plant could select the Pratt & Whitney PW6000 engine developed uniquely for the A318. The original -100’s lacked the range for US coast-to-coast operations. no commonality could be offered with V2500 powered aircraft. the -200 (although not as remarketable as the A320-200) enjoys a sizeable market base. they should give a good indication about the price dynamics of a new A320-200. From that viewpoint. Airbus decided to offer both options: Airlines that already operated CFM-powered aircraft and preferred the commonality element could select a CFM56-5B8/9 powered A318. As always. a higher weight schedule. Recent market experience has proven that. The A321-200 is offered with MTOW’s ranging from 89. with the basic MTOW 89. at least for as long as the current downturn lasts. it remains to be seen if the PW6000 story will ever have a happy ending. the PW6000 is only operated by one airline. From that perspective. Apart from some DAC powered planes. Currently. offering a more optimised engine type would jeopardise the important commonality benefit.
This mechanism can in some cases result in delivery prices. . the C919 will select the CFMI LEAP-X. P&W’s GTF. it seems that production of the A320 and 737NG could continue until the end of the next decade. While Airbus is occasionally accused of a more aggressive pricing policy. Because the A320 was launched long before the 737NG the A320 has lived through more downturns. While asset base ﬁnancing is focused on the aircraft. another potential aerodynamic improvement was being tested — a set of larger NG-style winglets. The main feature of the assumed update would essentially comprise the re-engining of the existing airframe. and the MRJ. It seems the Chinese narrowbody programme. the quality and concentration of the operator base does play a role. is already on board the smaller CSeries. the Russian MS-21. in particular engine technology. Radical designs like a small twin-aisle. As history has proven. The prospect of a more or less radical mid-life update is causing much speculation. used A320 values have ﬂuctuated slightly more than 737NG values. more fuel efﬁcient. Both manufacturers have indicated that current technology. a number of A320 operators defaulted during the post 9/11 crisis while most of the 737NG operators survived. While a little over 11 per cent of the entire Westernbuilt jet ﬂeet is in storage. With respect to the eventual successor for the A320 (frequently referred to as a ‘game-changer’). it will be important to learn which of these improvements can be retroﬁtted. Certification of the cargo conversion is expected by the end of 2011 for the A320 and end of 2012 for the A321. it will probably have consequences for future existing portfolios is significant.8 per cent (according to Ascend online. A thorough analysis of the default probability of any of the major operators should be a part of due diligence. a lifting blended-wing body and open rotor engine technology also cannot be excluded. Will this mean that technological improvements to the A320 will only be evolutionary? Airbus already introduced the CFM-56 Tech Insert and V2500 SelectOne engines. Airbus Freighter Conversion GmbH. the highest storage of any series within the A320 Family is for the A320 with only 3. now called the PurePower PW1000G . and late-built A320s and 737s in worth watching as despite protestations to the contrary from interested parties. and will soon add a redesigned upper-belly fairing. The project found a launch customer at the Farnborough Air Show in 2008 when Aercap announced an order for 30 conversions for its own portfolio of A320s. allegedly resulting in signiﬁcant discounts. While no immediate impact on the existing A320 ﬂeet is expected. Less in the realm of science ﬁction is the future of the A320 and A321 as a cargo aircraft. These escalation clauses do increase the net ﬂyaway price of the aircraft between the date of signing the contract and the date of delivery. Asset based ﬁnanciers will ﬁnd this development values of existing aircraft. 42 . quieter aircraft with lower maintenance costs. both for the individual types and the collective family. liquid single aisle aircraft. it is unlikely to be an explanation for the higher volatility. Previously similar step737NG from the 737 Classic aircraft family and so the market is not unfamiliar with the practice. Pratt & Whitney has much to gain and has developed the GTF with the clear intention to regain lost ground in the market. There are a number of signiﬁcant ﬂeet concentrations. At the time of writing. Current thinking is in terms of a greener. the potential damage to future values of changes in engine technology were applied to create the a reality. will not bring the required gains in operational cost for a new generation of mainline 150-seater aircraft required to justify the launch of a successor.Both Airbus and Boeing have announced they are studying programmes to equip their existing airframes with the new CFMI and/or PurePower engines. a higher number of A320s faced distressed market circumstances compared to the rival 737NG. a JV between EADS-EFW and UAC-Irkut. is developing a passenger-to-freighter (P2F) modification programme for the A320 and A321. The current surplus of A320 Family aircraft (as represented by the ﬂeet percentage ‘in storage’) is relatively modest – as is to be expected for a modern. August 2) — not bad for a type that has been in production for over 20 years. improved aerodynamics. especially in case of long lead times. especially given the upward trend in fuel prices. While none of the incumbent airframe and engine OEM’s in the 150-seat market have a real incentive to push this. even for an asset-based ﬁnancier. Historically. Consequently.AIRCRAFT FINANCE GUIDE purchase contracts. a high ﬂeet concentration with one or more weaker THE FUTURE Based on statements from both Airbus and Boeing. The storage percentages for the A319 and the A321 are also negligible. As a coincidence. For existing A320 operators. signiﬁcantly exceeding the spot market. AIRCRAFT FINANCE GUIDE 2011 airlines increases vulnerability of the type. should a signiﬁcantly more efﬁcient GTF or LEAP-X powered A320 or 737 become particular. very little seems clear except that we are unlikely to see this aircraft in the air before 2020.
From an asset based ﬁnancier’s point of view. the A319. Competing in a market used to Boeing narrowbody freighters. early-built A320 Classics no longer command the conﬁdence of most ﬁnanciers. While the division of the A320 ﬂeet into a CFM and an IAE AIRCRAFT FINANCE GUIDE 2011 engine segment can be viewed negatively compared to the competing 737NG.Such programmes have traditionally improved re-marketability and had a positive effect on residual values. ■ 43 . The A318 clearly falls outside of this category. the A320 will have a tough job establishing itself.AIRCRAFT FINANCE GUIDE Unfortunately. the development of the project coincided with one of the worst downturns in the cargo market and cargo operators seem more focused on survival than on ﬂeet renewal. The value history of the A320 confirms its suitability for financing. it will be a challenge for Airbus to create an aircraft that can exceed the attractiveness of the A320 for the air finance community. Clearly. the absolute size of both segments is such that the impact on financing is minimal. Many investors have come to view the availability of a cargo conversion project as an insurance policy for early-build aircraft.. The main uncertainty for the A320 Family seems to be the timing of the service-entry of any successor models. the A320 will offer more modern technology as well as a larger fuselage cross section plus signiﬁcant belly cargo volume. Despite this. the possibility of a new engine option (NEO) for the A320 Family remains the subject of much speculation. feedstock passenger A320s and A321s may become affordable for conversion sooner than anticipated. The majority of A320 Family members are among the most liquid commercial jets in the current market. While Airbus has implied this will be post-2020. It will take a long time before that aircraft will also be referred to as a ‘no-brainer’. let alone expansion. In addition. A320 and A321 are among the most attractive aircraft types. From a ﬁnancier’s point of view the availability of an afterlife in the cargo market is without any doubt a strong positive element when analysing a commercial jet. a radical open-rotor powered lifting body or a simple conventional re-engining. a number of ‘odd ball’ A320 members will generally be avoided by ﬁnanciers or will only be considered under very conservative terms. As a side effect of the current crisis. Whatever final decision materialises.
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