Re-engine competition started – how it will impact the aircraft owners in this segment?

The on-going re-engine manufacturing competition, plans for launching new aircrafts as well as unceasing predictions for changes in aircraft market are the factors to unquestionably influence the owners of the exploitable aircraft fleet. The experts of AviaAM Leasing have noticed that whilst the world is keeping an eye on the competition among the new engine manufacturers, airlines have to confront somewhat different challenges, namely the issue, whether it is worth investing into a prospective wide-range body aircraft market or whether to purchase Bombardier C-series. Another option could be waiting for Airbus and Boeing to be re-engined with A320 and B373 NG. Finally, companies could simply settle with an alternative - use or lease a few year old aircrafts.

Due to continuous competition with Boeing, this year Airbus has already presented A320neo equipped with new engines. This being the reason for the decrease in Boeing sales, the company has returned the compliment by presenting Boeing 737 NG - also re-engined. However, this process as well as the previous re-engineering programs will ask for a significant input on behalf of engineers as well as will incur additional costs. According to major aircraft producers, the ones re-engined will result in fuel consumption efficacy and engine durability. It is expected that the new engines will result in 15-20 percent decrease in fuel consumption and is also sure to significantly reduce the cost of maintenance. For instance, compared to B737-300, the amount of fuel consumed per single flight hour in Boeing 737-700 has decreased by 9.5 percent. On the other hand, the cost of engine maintenance has increased by 15 percent.

At the same time AviaAM Leasing experts predict that acquiring re-engined aircraft as well as purchasing brand new aircrafts will be more complicated than it has been so far. When renewing an aircraft fleet companies usually apply the method of TCO (Total Cost Ownership) – a tool for pricing, evaluating and comparing not only the purchase cost but also its management, maintenance and disposal expenses. This method, as a rule, is employed when comparing one aircraft against another, yet not applicable to compare the aircraft in operation with a brand new’, - comments Linas Dovydenas, the board member of AviaAM Leasing.

In the search for the best solution the companies willing to renew their aircraft fleet have to weigh the following: fuel consumption and forthcoming fuel prices; reliability and maintenance costs of re-engineering; an overall effect on a current aircraft fleet.

‘An aircraft fleet structure is one of the major factors when making the final decision. New aircraft acquisition or the retirement of an existing one has a strong impact on the company’s overall financial position, its operating costs and the ability to serve specific routes as well as an increase or decrease in the flow rates and capabilities. The decision to acquire a new aircraft by represents a huge capital investment with a long-term operational and economic horizon. Suppose that in 2008 the cost of a typical twin-engine, narrow-body, 150-seat aircraft that might be used for short- to medium-haul services ranged from USD 50 to 60 million. The seat price on a long-range, wide-body aircraft such as Boeing 747-400 topped USD 225 million, the seat price on long-haul flights by Airbus A380 accommodating more than 600 passengers amounted to USD 300 million’, said L. Dovydenas.

According to 2008 data of Avitas Bluebook of Jet Aircraft, an Airbus A320-200 made in 2007 cost USD 36.3 million while its current price is USD 28.3 million. In 2007 the experts predicted that this aircraft should cost up to USD 30.7 million in 2015; however, the recent years’ forecasts suggest that it might cost only USD 27.7 million. The analogous situation can be traced with the prices of other aircraft manufacturers (See Tables 1.1 – 1.6).

It is apparent that depreciation costs, long-term financial liabilities and associated interest costs are the criteria that strongly effect an airline’s financial position. Since some aircrafts can remain in exploitation for over 30 years, acquisition of a new aircraft may also have a long-lasting economic effect. For instance, McDonnell Douglas DC-9 was launched in 1960 and has remained in exploitation ever since.

Forecasts and Facts

According to the data of Boeing Current Market Outlook in twenty years time the aircraft fleet should double in its current size and constitute up to 39000 units including aircraft capable of accommodating up to 200-500 passengers. The demand for such type of aircraft will increase up to 7000, i.e. one fifth of an overall anticipated commercial aircraft market. Bombardier experts expect that the business type aircraft fleet will expand to 39000 units.

AviaAM Leasing maintains an opinion that a public introduction of new and refurbished aircraft does not necessarily imply large demand. As concerns production of separate manufacturers, a successful B737-200 program can act as an illustrative example of such assumption. When NG production was launched, 900 aircraft were already in exploitation. Even after the launch of B373-300, the fleet was still largely comprised of B373-200 type of aircraft. Renewing Airbus A320-200 brought similar results.

When comparing all largest aircraft manufacturers in terms of fulfilled orders (See Tables No. 2.1-2.3), one can see that A320 has already delivered 168 units. Altogether since 1988 the company has fulfilled more than 7600 A320 orders. In the mean time Boeing 737 fulfilled more than 6800, Embraer 195 – 75 and Bombardier C-Series – 61 orders in the same period of time.

However, when comparing re-engined and brand new aircraft, the former should direct more attention to lowering costs, minimizing risks and attracting more airlines than the latter. The refurbished 130-seat aircraft should enjoy bigger popularity than the wide bodied ones. This can be explained by passenger preference to square comfort and flight frequency as well as company desire to use aircraft capabilities to the full: the more hours an aircraft spends off ground per month, the less a single hour of flight costs.

‘After carefully considering all pros and cons companies arrive at the most optimum decision. A new engine makes an aircraft newer, better and technologically more advanced; however, the price is naturally higher. Purchasing an older aircraft and investing something like a million in cabin refurbishment makes an aircraft visually seem new, but, from a technical point of view, it will consume on average 7% more fuel. One should never ignore the fact that new aircraft can be less attractive to buyers. The ever growing competitiveness affects aircraft owners – new aircraft can simply be too pricey while the old ones incur smaller maintenance costs. Everyone can understand an aircraft owner not wishing to take risks regarding the sustainable value’, - says L.Dovydenas.

Additional challenges

Aircraft owners, finance specialists and operators are concerned with properly identifying all B737NG and A320neo market opportunities: how acquisition of the aircraft may affect the overall existing fleet appeal; how can these aircraft impair the value of the fleet. Credits, structural debts and other financial liabilities are serious concerns that must be taken into account than considering the sustainability of aircraft in exploitation. Every functional irregularity inevitably results in a decrease in owners’ financial flexibility.

AviaAM Leasing experts point out that microeconomic factors are also necessary to address while renewing an aircraft fleet. These include environmental and airports’ restrictions, increasing air pollution quota, political circumstances and international economics. As concerns the acquisition itself, buyers must consider new requirements and regulations as well as all maintenance related technical costs and expenses necessary for pilot and cabin crew training. According to the Boeing Current Outlook analysis, more than 23000 pilots and 32000 technical maintenance specialists will be needed every year which, needless to say, will incur additional economic costs.

‘Naturally, we need to consider the possible re-engining effects on aircraft leasing companies. Although aircraft leasing can seem fairly expensive, many air carriers use such service as it enables them to be more flexible, renew fleets more often and requires less investments’, - explains L.Dovydenas.

On the other hand, AviaAM Leasing urges to remember the slightly forgotten old aviation rule which implies that exploiting the existing aircraft fleet may also lead to a boost in productivity in several ways: increase the number of flights per day; expand routes (long hauls can also accelerate aircraft productivity and make use of all its capabilities in a single day) and, of course, allow the possibility of installing more business class seats.

Annex No.1

Table No. 1.1 Airbus A320 aircraft value according to 2008 data: at the time and anticipated.


Future Base Values at 2.5 % Inflation
Year Current Market Value 2008 base value 2011 2012 2013 2014 2015 2016
2006 39.9 38.2 34.0 32.6 31.2 29.9 28.6 27.5
2007 41.8 40.8 36.3 34.9 33.4 32.0 30.7 29.4
44.5 39.2 37.7 36.3 34.8 33.4 32.0

Table No. 1.2 Airbus A320 aircraft value according to 2011 data: at the time and anticipated.


Future Base Values at 1.5 % Inflation
Year Current Market Value 2011 base value 2012 2013 2014 2015 2016
2006 26.6 31.7 30.2 28.7 27.3 25.9 24.6
2007 28.3 33.7 32.1 30.6 29.2 27.7 26.3
2008 30.8 36.1 34.2 32.6 31.1 29.6 28.1
2009 35.0 38.6 36.6 34.7 33.1 31.6 30.1
2010 39.7 41.3 39.1 37.1 35.2 33.5 32.0
43.3 41.1 39.0 36.9 35.0 33.4

Table No. 1.3 Boeing 737-800 aircraft value according to 2008 data: at the time and anticipated.


Future Base Values at 2.5 % Inflation
Year Current Market Value 2008 base value 2011 2012 2013 2014 2015 2016
2006 43.8 40.2 35.6 34.1 32.7 31.3 30.0 28.8
2007 44.9 42.8 38.1 36.5 35.0 33.5 32.1 30.8
46.6 41.2 39.6 38.0 36.5 35.0 33.5

Table No. 1.4 Boeing 737-800 aircraft value according to 2011 data: at the time and anticipated.


Future Base Values at 1.5 % Inflation
Year Current Market Value 2011 base value 2012 2013 2014 2015 2016
2006 34.6 34.6 33.0 31.4 29.9 28.4 26.9
2007 36.7 36.7 35.0 33.4 31.8 30.2 28.7
2008 39.1 39.1 37.1 35.4 33.8 32.2 30.6
2009 41.8 41.8 39.6 37.6 35.9 34.2 32.6
2010 44.7 44.7 42.3 40.1 38.1 36.3 34.7
46.9 44.5 42.2 40.0 38.0 36.3

Table No. 1.5 Embraer 195 aircraft value according to 2008 data: at the time and anticipated.

EMB 195

Future Base Values at 2.5 % Inflation
Year Current Market Value 2008 base value 2011 2012 2013 2014 2015 2016
2006 28.2 28.2 24.2 22.9 21.8 20.7 19.8 18.8
2007 30.4 30.4 26.1 24.8 23.5 22.3 21.2 20.3
33.6 28.7 27.2 25.9 24.6 23.3 22.2

Table No. 1.6 Embraer 195 aircraft value according to 2011 data: at the time and anticipated.

EMB 195

Future Base Values at 1.5 % Inflation
Year Current Market Value 2011 base value 2012 2013 2014 2015 2016
2006 22.9 22.9 21.6 20.3 19.2 18.0 17.0
2007 24.7 24.7 23.2 21.9 20.6 19.4 18.3
2008 26.6 26.6 25.1 23.6 22.2 20.9 19.7
2009 28.7 28.7 27.0 25.4 23.9 22.5 21.3
2010 31.1 31.1 29.2 27.4 25.8 24.3 22.9
33.0 30.8 29.0 27.3 25.7 24.1

Table No. 2.1 Airbus A320, Boeing 737-800, Embraer 195, Bombardier C-Series aircraft ordering statistics

Total Orders
Years A320 B737-800 C-Series EMB 195
2006 303 157

2007 600 326

2008 660 290
2009 206 71 33
2010 434 384
2011 117 257 28

Table No. 2.2 Airbus A320, Boeing 737-800, Embraer 195, Bombardier C-Series expected aircraft deliveries


Years A320 B737-800 C-Series EMB 195
2011 129 103
2012 603 416
2013 847 361 1 3
2014 473 297 27
2015 395 376 23

Table No. 2.3 Airbus A320, Boeing 737-800, Bombardier C-Series orders, deliveries and production

A320 B737-800 C-Series
Orders 5080 8994 61
Deliveries 2722 6848 0
In operation 2639 2146 61

About AviaAM Leasing:

AviaAM Leasing, an integrated aviation company engaged in aircraft leasing and management, is one of the fastest growing aircraft leasing entities in the region. As a full-service lessor AviaAM Leasing also offers a wide range of additional services including fleet planning, revenue and route analysis, deal structuring, technical support and more. Established in 2007, AviaAM Leasing is headquartered in Vilnius, Lithuania, with its representative offices in Russia, Poland, Estonia and Italy. For more about AviaAM Leasing, please visit us at www.aviaam.com.

Source: AviaAM Leasing

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