IBA Report by David Archer, Senior Engine Analyst: issued September 2019
The grounding of the 737 MAX fleet has been one of the most widely discussed aviation events of recent history. Following two tragic accidents, the 737 MAX fleet remains grounded until the world's aviation authorities deem it fit for service. Speculation has inevitably turned to the impact on the market and the longer term ramifications for both the aircraft and the engines.
Since the decision to ground the fleet in March 2019, the 737 MAX fleet has remained out of service awaiting word from Boeing and the FAA as well as the EASA who have stated they will not follow the FAA's decision without independent testing. This may well also be an opportunity for a power play from China's CAAC given the current trade dispute.
For Boeing this has obviously been a challenging time. The recent August announcement suggested program losses of $4.1b to date with no definitive end in sight. IBA has seen events including order cancellations from Garuda, law suits launched against Boeing and flyadeal opting for the Airbus A320 over the 737 MAX. However, it is important to put these ‘fall out' events in relative terms. The order book remains the strongest redeeming feature of the 737 MAX with substantial orders remaining of 4,426 aircraft and 8,852 CFMI LEAP-1B engines, not including spares.
Recent announcements from American Airlines, United Airlines and Southwest Airlines suggest the re-entry to service will not begin until early 2020. Production of the 737 MAX has continued and as shown in Chart 1, according to Boeing, production rates have been reduced to 42 a month. The engine manufacturer CFMI have not adjusted their production output and have maintained levels that match that of Boeing's at their peak - of 52 per month.
To help understand any potential long term impacts on the future of the 737 MAX, it helps to compare year-on-year entry into service events of the 737NG with the 737 MAX. The following chart plots the deliveries for each platform's entry into service by year-on-year along with a very conservative forecast of 737 MAX deliveries. It is worth noting that the graph does not take into account the forecasted spike in deliveries that is expected once the 737 MAX is flying again.
Looking at Chart 2, IBA does not expect any change in year 3 deliveries of the MAX but with so many aircraft now awaiting delivery, and the assumption of a 2020 re-entry to service, the MAX should comfortably retake the lead as we move through year 4. The chart helps to highlight the scale of the impact on deliveries and also gives an indication of potential recovery for the 737 MAX platform once returned to service. This should mitigate fears of the market suffering long term damage to aircraft or engine values.
Bringing into focus the LEAP-1B, discussions to date have largely ignored the impact of the grounding on the engine fleet. For the OEM, it would appear that the consequences have been both positive and negative. Prior to the grounding, it was widely known that CFMI was as much as 4 weeks behind schedule on deliveries - an issue which no longer exists with CFMI opting to maintain production levels at peak rate.
As you may know, the EIS of the LEAP family has not been entirely smooth, and CFMI have been able to use the ‘grounding time' to help resolve some of its early teething issues without causing further AOG events. As an example, the fuel nozzle coking issue which has come to light will have a remedial fix in place before the end of 2019, before re-entry to service, with a full fix in early 2021.
There is however, one major after-effect of the grounding for the engine platform which cannot be mitigated. MROs globally are currently struggling with the maintenance demand requirements of other engine models including the CFM56-5B, CFM56-7B and V2500-A5. With the suggestion that deliveries of both current production and stored aircraft will coincide for as much as 2-3 years there could well be a new bow-wave of shop visit remand for the LEAP-1B in the future.
This suggests the future MRO industry will experience a spike in slot demand over a sustained period. The inevitable outcome is constricted shop capacity, increased demand for spare engines, increased shop visit lead times and the need for better shop visit planning from operators. A detailed forecast of these events will be provided at IBA's Big Market Debate in Dublin next week and it will also be available on the Insight section of our website.
Overall, IBA's outlook for the LEAP-1B remains optimistic. Undoubtedly it has been a disruptive period and the knock on effects will be noticeable down the line in shop visit backlogs. However, as illustrated with the Half-Life Value curve in Chart 3, IBA does not see a negative impact on the value of these assets now, or in the future beyond the expectations we produce in our forecasts.
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There will be some impact from the 737 MAX grounding on the LEAP future shop visit program but as yet our opinion on engine value and future value remains unaffected. Keep up to date with engine values by subscribing to iQ Engines, our new online engine valuation module or join our LinkedIn and Twitter following.
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Whilst 737 MAX sale and leaseback rates look set to strengthen in the near term, the future looks bleak for direct lease rates. As far back as the mid 2018s, lessors were experiencing difficulty placing the MAX, resorting to placements with weaker credit airlines at increasingly softer rates. By the end of the 2018s, rates had dipped as low as $270,000 - $280,000 and, as 2019 dawned, even before its grounding many lessors and operators were questioning the MAX's value against the comparative attraction of its 737-800 sibling.
The grounding of Boeing's troubled 737 MAX programme over 16 months ago had an enormous impact on the global aviation industry. Operators, lessors and airports were all impacted by the consequences as well as Boeing themselves. New flight control software has been developed in relation to the, much talked about, Manoeuvring Characteristics Augmentation Systems (MCAS) and a welcome recertification process is now possible. We can allow ourselves to realistically envisage a much-needed conclusion to the aircraft's grounding by Q3 or Q4 2020.
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