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10/07/2019

Will the 737 MAX Base Value Change?

Investors should remain confident in the 737 MAX Base Values and be prepared to play the long game

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IBA has approached aircraft grounding and accident issues in the past from the perspective of investors and considered how residual values could be impacted. IBA's CEO, Phil Seymour, reviews the 737 MAX's position and outlines IBA's long-term view on values. He explains why, over time, Base Value has proven to be a reliable long-term benchmark for narrowbody aircraft.

 

IBA takes a long-term view on Base Value and has not made any reactionary changes to its Boeing 737 MAX Base Value projections.

The tragic circumstances which have led to the MAX groundings have come at a time where there is a high forecast demand for narrowbody aircraft, robust market transactions, and extensive backlogs. These conditions go some way to explain why IBA is sticking to Base Value forecasts for the MAX. Let's review what some of those assumptions are that set out our Base Value projections.

 

IBA forecasts a wave of replacement demand as the existing narrowbody fleet ages . . .

Powered by IBA.iQ Trends, chart 1 shows the number of aircraft at 25 years + from 2020 to 2029. The forecast demand for replacement aircraft in the narrowbody sector is high.

Given this is only replacement demand and not growth, it is hardly surprising that the current MAX backlog exceeds 4,400 aircraft. By 2027, over 2,000 current generation Boeing 737 NG and Airbus A320ceo aircraft will have reached 25+ years of age.

 

Aircraft such as the Boeing 737-700 and Airbus A319-100 will undoubtedly face accelerated retirements, earlier than 25 years, given that these types are in demand from the part-out market. Those buyers are looking to feed the parts into the 737-800 and A320 aftermarket given the weak lease rates for the smaller variants. Some examples of larger variants such as the Boeing 737-800 and Airbus A320/A321 will be converted to freighters as those programmes become more established.

 

The forecasted shortfall in passenger capacity is driving demand for new generation and fuel efficient equipment such as the Boeing 737 MAX and Airbus A320neo.

 

 

Boeing 737 MAX family order book is extensive and features prominent Airlines and Lessors

 

Base Value opinion is also driven by the projected order book, diversity of lessor and airline orders, concentration of fleets and geographical spread of airlines. The MAX
order book looks strong with a positive level of diversity.

 

Both Lessors and Airlines have been attracted to the aircraft with Southwest, flydubai, ALC, GECAS and Avolon leading the numbers ordered. Around 400 aircraft have been
ordered by lessors based in or backed by China and Japan.

 

The two IBA.iQ extracts below show the diversity of lessor/lessee order book and the broad global spread.

 

 

 

 

 

Market Values for the 737 MAX will fluctuate due to external pressures, but the Base Value will hold fast . . .

The MAX's market value will be defined by the current state of demand for aircraft, sale leasebacks and leasing activity. Current market conditions can be summarised
as follows:

 

  • Strong demand in the narrowbody sector is expected to continue
  • The sale and leaseback space is expected to remain competitive amongst new
    investors but margins are weak
  • We are expecting to see consolidation amongst lessors and lessor portfolio trading
    which should drive sales of aircraft with leases attached - Boeing 737-800 proving
    popular YTD
  • Rising direct and indirect costs will favour new generation aircraft
  • Interest rate rises should push lease rates higher - lessor competition will counter
    this effect
  • Bankruptcies could push aircraft into the secondary market - so far values have
    remained robust
  • The P2F market is increasingly turning to the new generation 737-800 for feedstock
    as Classic feedstock dwindles
  • Next Gen aircraft production is still below target - although engine technology and
    grounding issues are being resolved the supply chain has been struggling to sustain
    OEM production rate increases

 

If we look at historic events, there have been many cases - such as the early build 737 NG - where market value fluctuated around the steady Base Value. With reference
to Chart 4, a low point was the post 9/11 downturn - it took a few years before the market returned to base - and this shows that potentially many millions could have been "lost" unless a steady view had been taken regarding underlying economic value. Similarly, there have been occasions when Market Value can exceed Base and a similar
"steady" view should be taken at these times too.

 

 

Boeing 737 MAX 8 - IBA Base Value profiles

 

Based on the following example specification 737 MAX 8, 2019 delivery, IBA are predicting Base Values profiles as shown in Chart 5.

 

 

IBA vs other appraisers in the market

 

With information supplied by Boeing, Chart 6 shows the Base Value curve from IBA and other appraisal firms. Note: Each firm's curve has been cleansed of inflation effects as
assumptions differ between appraisers, typically inflation rates of between 1.0% and
2.0% are used in the industry.

 

To IBA's knowledge, none of the leading appraisers have changed their Base Value opinion of the Boeing 737 MAX on the basis of the grounding issues.

In the comparison below we look at the base value profile of a 2019 delivered aircraft:

 

 

IBA Base Value considerations

IBA has been asked about the issues that could force an appraiser to change its Base Value opinion of an aircraft. There are some circumstances when this might happen:

 

  • Program longevity - IBA expects the MAX production to have the necessary longevity. We predict production will continue at least through to the end of the

    next decade (2030'ish).

  • Global market - Certification and approval by regulators needs to be on a global basis. For the MAX it may be phased rather than unilaterally returned to service.

  • Overall sales/backlog - There is a large backlog for the MAX. We expect to see the

    usual/expected deferrals and cancellations associated with all programs. The huge

    MAX backlog has room for changes.

  • Operational costs increase - a scenario where a cost such as 1. fuel were to increase

    rapidly and consistently that it accelerated retirements or 2. an alternative or new

    technology acted as a catalyst for an early replacement.

 

Over time, Base Value has proven to be a reliable long-term benchmark for
narrowbody aircraft.

IN CONCLUSION . . .


The single-aisle market is robust and underpinned by healthy fundamentals . . .

 

Rising operating costs will favour new generation aircraft such as the Boeing 737
MAX and Airbus A320neo. IBA projects robust long-term demand for new technology
narrowbody aircraft.

 

IBA takes a long-term view on Base Value and has not made any reactionary changes to
its Boeing 737 MAX Base Value projections. Similarly other leading appraisers have not
changed their 737 MAX Base Values.

 

The Boeing 737 MAX backlog remains extensive and features a diverse mix of airlines
from top-tier flag carriers to LCCs, ULCCs and charter carriers.

 

Aircraft programmes often face technical and market challenges - history has shown
that these challenges can, and have been overcome.

 

A FINAL WORD

IBA has had many enquiries regarding recent Airworthiness Directive (AD) activity. The press picked up on an AD that was applicable to some NG and MAX aircraft relating to
a leading edge slat issue. Typically ADs are issued at the rate of 10-20 per year so we expect more. This is a sign that the OEM process is working and should not be seen as
an immediate negative as and when we see further ADs issued.

 

Our door is always open to investors seeking independent appraisal and technical advice. IBA has the most experienced full time combination of appraisal and technical
teams combining ISTAT appraisers, with licensed engineers working in an EASA CAMO organisation.

 

If you have any further questions please contact: Phil Seymour

 

When it comes to fleet data, aircraft valuations and market trend analysis, our up-to-date, comprehensive and accurate data platform IBA.iQ is essential for future transaction due diligence and risk evaluation.

Book a Demo

 

Our insight video can be viewed here on our YouTube Channel.

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