IBA’s Engine Market Update Webinar has been designed specifically around the business needs of investors, lessors, operators and financiers looking to explore the engine market and understand the impact from Covid-19. This session provides valuable insight to help the aviation community to navigate current challenges, identify future opportunities and mitigate risk.
IBA’s Phil Seymour, President and David Archer, Senior Engine Analyst, share their insight on the impact of Covid-19 on the engine market. Topics covered include; value performance in a crisis for narrowbody and widebody engines, the impact in the short, medium and long term and a review of the A330 engine market and the GE90 market.
Webinar Synopsis – How will Covid-19 impact the aero engine market?
For more than 30 years, IBA has amassed and consolidated the wealth of aviation data and expertise that inform the services we provide. Our intelligence platform, IBA,iQ, enables us to consider how historical events can serve to illustrate the potential impact of COVID-19 globally and the behaviours we can reasonably expect to see within our industry, specifically the aero engine market.
The first Gulf War in 1991, 9/11, 2003’s SARS outbreak and the global financial crisis are all useful examples of events whose effect on aviation were significant. Reduced trading, diminished demand and a lack of confidence amongst the travelling public followed each of these crises but, ultimately, the markets recovered. There are marked differences with the COVID-19 emergency though:
- SARS was primarily limited to the Asia-Pacific region
- The 9/11 enemy was visible; additional security measures could mitigate against the threat
- Passenger and fleet numbers globally are today far higher. China alone has 450 million more people flying domestically than 10 years ago
We therefore anticipate the coronavirus pandemic’s impact will be far greater and wider ranging. We’re already witnessing deals being cancelled and the extent of the implications for airlines and the lessor market can be deduced from the unprecedented level of support being sought from governments. Engines and aircraft are being stored worldwide. Depressed fuel priced are welcome from a cost perspective but the most urgent issue currently is dwindling revenues. Trading has slumped but what will happen once the market begins its recovery? Who will capitalise on the opportunities that will arise as airlines seek to raise cash by liquidating assets such as engines?
We will address these questions by examining how the value of different engine types and their variants has performed during and after previous crises. The overriding message is that repeatedly, irrespective of the individual external circumstances, we witness engines returning to their base values after a crisis-driven fall. We can be confident in our trust of the base value and its strength.
We saw confidence rebound after 9/11 and SARS and both values and lease rates recovered. As a fleet matures, greater susceptibility to a downturn is apparent and market and lease values can drop below base but the base value drives what we ultimately expect. Though some new engines presented difficulties before Covid-19 and the market was complicated, new engines are consistently less vulnerable to downward pressure.
Here we witness market disparity between the A1 and A5 engines with a particular focus on 9/11 and SARS. Although we are as yet unaware of the full scale of Covid-19’s impact, we again see here that newer build standards show greater resilience and values recover over time. We can also rely on the narrowbody’s robustness compared with that for widebodies.
As expected, the widebody market displayed a more dramatic softening and a slower recovery but over the long-term recovery does happen.
There is sometimes a lag between the recovery of market values and lease rates because the latter can be more volatile. The + and – figures on this graph show the upper and lower value boundaries we’ve seen in the past compared with the market value.
IBA’s Outlook Summary
Our invaluable data source equips us to forecast aero market behaviours over the short-, medium- and long-term using historical patterns as a guide.
In the short-term we expect low utilisation, reduced demand and depressed transaction volumes. Transactional values and lease rates will soften, particularly for mature engines. Widebodies will be more vulnerable to downward pressure than narrowbodies.
Medium-term, beginning with the narrowbody market, values will start to pick up and demand for leases will grow. Maintenance investment will be offset as airlines strip out unnecessary expenditure.
A return to ‘predicted’ trends is anticipated long-term despite exact timescales being impossible to forecast.
A330 Market Overview
An analysis of the A330 is interesting due to the Trent 700’s dominance over the CF6-80E and the PW4000-100. Though it’s early days, we’re aware of signs that Rolls Royce may be opening up to the aftermarket, in which case these engines are an investment growing more worthy of attention. Previously a difficult asset to move, if the aftermarket does become more accessible we should see stronger residual values and an improved outlook.
GE90 Market Update
With fleets grounded globally, we could say every aircraft is currently too big as COVID-19 strangles demand. The emergency focuses the mind, however, on how four engine widebodies can usefully be deployed in future. Some carriers appear to be concluding they’re too large and are starting to favour instead their smaller twin engine family members. We could start to see larger aircraft retired first and leases on 777s being extended.
To sum up, whilst the exact scope and longevity of this pandemic can’t be determined, our experience of past events indicates the proven reliability of aircraft and engine base values over time. Our Engine Values Book is currently nearing the end of its production and we hope to have it published by the month end. The market values shown will be pre Covid-19 levels since, without transaction points for guidance, pinning future values on assets is hugely problematic. Focus should therefore be concentrated on base values which, in accordance with the ISTAT definition, IBA deems to be:
The Appraiser’s opinion of the underlying economic value of an aircraft in an open, unrestricted, stable market environment with a reasonable balance of supply and demand and assumes full consideration of its ‘highest and best use’.
We used data and insights available through our intelligence platform IBA.iQ to create this webinar and are presently offering free trials for those wishing to learn about its capabilities. To find our more, click here.