Posted May 28, 2014 2:35 PM
By Laurence Reid
In last week's Values & Market Outlook Webinar, market participants posed many vital questions to the Ascend Consultancy team.
Here we attempt to address just some of the issues raised.
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Can we comment in any more detail on the value in part-outs? Specifically in terms of components, engines, airframes etc.
At the beginning it is fair to say that about 55%-65% of the value is held up in in the landing gear, APU and avionics. What is also very valuable in the first handful of part-outs are what are known as the engine QEC kit, which is not part of the engine itself but part of the casing, and can include the thrust reversers. We have seen them trade for very lucrative amounts in themselves, both on 737NG, 777s and A330s. Although after only a few of these are removed the value of them diminishes rapidly, there is only demand for so many and then the market dries up. Interestingly, with the value behaviour of the landing gear and avionics, the value of those in themselves doesn’t diminish so much but their percentage of the total airframe value does increase over time. As you go further down the retirement cycle it reaches 75% of the value quick easily. But some other components that also hold varying degrees of value can include engine pylons, flight control surfaces, hydraulics, windscreens, galleys (at least initially), air conditioning units, seats and winglets. In the end it starts to be a bit of an ad-hoc market, depending on who wants what.
In summary it is the condition of the aircraft that really drives the value and obviously also the supply and demand in the parts market.
Will Boeing have to cut 777 production rates to help transition to the 777X?
Boeing certainly do have some work to do. We estimate they have approximately 80 aircraft a year to sell in the 2017-19 period before the transition to the 777X. We know that the 777-300ER is a very popular aircraft and has been selling very well. Of course the question is: do the airlines and lessors want a last off the line aircraft in those final three years before the transition?
So it may well be that yes we will see some reduction in the 777 rate, maybe not by too much, and then probably increasing again as the 777X comes in. We do expect that to be a very popular aircraft.
When is the next down cycle in commercial aerospace?
We do not think from an OEM perspective that there will be another down cycle in terms of production. OEMs clearly to try keep rates constant to maintain a consistent cost-base and through the last cycle maintained production rates in the face of reducing demand. Of course there could be another demand down cycle and it is very hard to predict when that could be. It could be caused by some global economic event or it could be caused by some global geopolitical event. The only thing we suspect is that this is a cyclical industry and it will occur at some point.
So in the face of a demand down cycle and supply constant, we are suggesting that whenever it occurs the impact will potentially be on economic life and values. This is because aircraft values and lease rates are closely geared to supply and demand balance. At the moment whilst we are in recovery phase and we are seeing lease rates recovering, we think in the long term whenever the next downturn occurs there will be some fundamental impact on values.
How do we see potential increases in interest rates impacting finance?
Interest rates typically affect rentals of aircraft first, as lessors will pass on their cost to operators where possible. It is typically easiest in the new aircraft market, as opposed to the secondary market. Midlife aircraft values tend to improve in a higher interest rate environment simply because the assets are relatively cheap – so interest rates affect them to a lesser degree. This means that a midlife aircraft tends to have a higher relative value in those circumstances because of their lower asset values.
How long can the Boeing and Airbus narrowbody race continue at 50+? How will the current supply chain be able to maintain high production rates?
Of course at the moment the OEMs are both in the process of starting to transition from their current rates to higher rates, and at the same time they are transitioning to their existing variants to new variants. So that will be quite a challenge.
Supply chains will also be challenged because they are delivering into both of these OEMs in some cases. There is a big investment challenge for both supply chain and OEMs.
We do think they will manage, but it is increasingly a challenge.
What supply chains do not like is ups and downs. They prefer to have a vision of where they have to get to and the stability to prepare for it. There is some danger if we go beyond the currently announced rates of up to 46-47 a month, if we talk of 50+. Based on our forecasting work that could be a bit of over-hype, if there were to occur those kind of rates.