April 15, 2013
In many ways, the aviation industry's business environment during the past few years has created a perfect storm for early aircraft retirements, reduced valuations and engine part-outs.
Fuel prices are high, and new aircraft are on the way that promise savings of 15% or more on fuel costs. The financing to acquire those aircraft has been cheap and easy to get, thanks to a long period of historically low interest rates and readily available export credit agency assistance. Simultaneously, it has become more difficult to obtain financing for used aircraft.
In addition to those factors, airlines' historically high usage of leased aircraft gives them more flexibility to get rid of aging jets, which they can simply return when the leases expire. The global recession dampened an increase in airline traffic and the need for fleet growth to carry those passengers. Passenger travel has come back, but the slow recovery of the cargo market has lessened the demand for the freighter conversions that can give old aircraft new life.
What will happen next, especially whether or when some of those contributing factors will change, is a hotly debated topic. For example, Boeing and aircraft lessor Avolon are pushing back hard against assumptions that the trend toward younger retirement ages will continue, because any assumptions that reduced the expected economic life of aircraft below 25 years would raise financing costs, lower aircraft valuations and increase depreciation. Currently, aircraft typically are depreciated to a 15% residual value over a 25-year period.
But, at the moment, the effect on the retirement ages and valuations of certain aircraft types is difficult to deny: An analysis using the Aviation Week Intelligence Network (AWIN) fleet database shows an average retirement age of about 23 years in 2012, down from about 27 in the three prior years and 29-30 each year in 2008, 2007 and 2006. Those retirements are inextricably linked to engines, because the tipping point on the retirement decision often rests on how much value the aircraft's owner or acquirer believes it can get from parting out the powerplants.
The impact of the perfect storm has not been universal, however, with some aircraft types affected more than others.
Airbus A320s and Boeing 737NGs: The most hotly contested debate right now is what the future holds for the current A320s and Next Generation 737s, given the pending arrival of the reengined, significantly more fuel-efficient A320NEO and 737 MAX. The fate of the current A320 is a big deal for lessors, because that has been an extremely popular model for them to acquire: More than half of the world's A320 fleet is leased, Frankfurt-based DVB Bank has determined based on data received from Ascend.