International Bureau of Aviation (IBA) met with a knowledgeable and senior delegate group of over 150 aviation specialists in the leasing and finance arena to discuss the investment and secondary market opportunities for the Boeing 777 and other twin aisle aircraft. The event was organised in partnership with Airline Economics and provoked lively discussions from the expert panellists as well as serious audience participation.
Key questions included: How much are values softening? Is the diminishing market for used 777s a short-term blip, or part of a longer-term shift due to the ease of financing new aircraft? What is the long-term outlook for twin aisles in general?
All agreed that the 777, particularly the 300ER, is a great aircraft. It is chosen and operated by flag carriers who may well renegotiate their lease options to continue flying, especially if they do not have new aircraft on order. The recent demise of Transaero, and the scheduled Emirates and SIA redeliveries will present a market surplus of 777-200s affecting values in the short term.
Potentially expensive reconfiguration and long lead times, added to lease-return conditions, flags up serious cost issues, and potentially impacts residuals. Engine costs, as ever, were raised as a factor and engine OEMs do appear to recognise they need to do more for the used market.
Phil Seymour, CEO of independent aviation consulting firm – IBA Group, who chaired the investor day and moderated many of the panel discussions, points out that there are 115 known lease returns scheduled by the end of 2020: “Demand and values for ‘middle aged’ large twin aisles like the 777 and the A330 are softening already and there are still 250 potential delivery slots for the 300ER available before the new 777X enters service. It’s a buyers’ market and even if you view Richard Anderson’s comments that Delta Airlines can buy a used 777 for $10m as sensational, it is closer to reality for an aircraft in below-half-life condition than many lessors would like to admit. In the case of the 777 the size of the aircraft is a crucial factor and the global fleet remains concentrated with 50% being operated by just nine airlines, and ten lessors manage 70% of the total fleet.
“Larger airlines have the infrastructure to manage aircraft of this type, but they will be looking for ten or more to make economic sense, whereas a lessor with one or two aircraft to place may find it hard to find new homes.”
He continues, “There is a missing link or offering in the secondary market. Potential new users of such large equipment need more than just being offered a leased aircraft. They need product and customer support to organise flight/cabin and technical training, spare engines and rotables. The support services are currently more limited than the narrow body markets of A320 and B737 where there are plenty of options for new airlines to consider. IBA can guide owners and operators through valuation and transition options with a view to putting together complete solutions, rather than just placing an aircraft.”
Overall it was interesting to note that the aviation community present believed that solutions would be found. Newer investors in the wide-body sector may be alarmed by the volatility, but the more experienced teams understand that the market uncertainty is part of the cyclical nature of aviation.
Phil Seymour concludes that a concerted effort by the manufacturers, supported by the engine OEMs, and out-of-the-box thinking regarding reconfiguration, that uses reconditioned parts to minimise costs and lead times, is the way forwards. “The B777 has been a hugely successful aircraft since entry into service in 1995 and the industry recognises this – but new choices and easy financing of new aircraft that are cheaper to operate is a reality. Securing a buoyant secondary market for twin aisles is the challenge for us all.”
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