The Possible Effect of the Coronavirus Outbreak on the Aviation Industry and Aircraft Values

In this edition of mba Aviation’s Insight Series, Sloane Churchill, Analyst – Asset Valuations, uses analysis of the effect of the SARS outbreak of 2002-2003 on aircraft values and the aviation industry to provide insight on how today’s Coronavirus might take its toll.

Key Concepts:

  • SARS increased volatility of market values for older vintage and out of production aircraft types more than newer vintage and in-production types, though market values generally recovered within three quarters. It is likely Coronavirus will similarly effect aircraft market values in the short term, but will have no long-term effects.
  • The timing of the Coronavirus outbreak over the Chinese New Year, slowing economic growth in China, and extensive travel restrictions are expected to make a larger dent in RPK’s than during SARS.
  • No health epidemic of the past 20 years has had a long-term effect on global financial markets, with most recovering with a year. While global airline stocks have taken an immediate hit due to the Coronavirus outbreak, it is not anticipated to have long-term effects on airline stocks.

The Possible Effect of the Coronavirus Outbreak on the Aviation Industry and Aircraft Values

Though the Coronavirus outbreak in China is reminiscent of the SARS outbreak in 2002 – 2003, the effects on the aviation industry have the potential to be quite different. So far, the Coronavirus has infected over 45,000 people, mostly in mainland China, leading to over 1,100 deaths. This Coronavirus is proving to be faster spreading, though less deadly than SARS, with a death rate of approximately 2.1%. Historically, while global health epidemics have hurt aviation by reducing revenue passenger kilometer (RPK) growth in the short term, there have been no long-term effects for any epidemic of the last twenty years, including SARS, Avian Flu, Swine Flu, Ebola, or Zika on aircraft values or the aviation market as a whole.

The SARS outbreak could provide some insight as to how aircraft values and the aviation industry might be affected by the current Coronavirus. mba values research shows SARS disproportionately affected aircraft values. Typically, older vintage and out of production aircraft were hit the hardest after the SARS outbreak, showing the most value volatility in the following two years. Newer vintage and current production aircraft were significantly less volatile.

Market values for aircraft and Brent Crude prices have historically had an inverse relationship; in low fuel price environments, aircraft values tend to increase as aircraft become less expensive to operate, while market values decrease in high fuel price environments. This is especially apparent in older vintage and out of production aircraft, as they are less fuel efficient, and thus more sensitive to fuel price. However, 9/11 and the SARS epidemic broke the correlation between Brent Crude prices and market values, and this relationship does not recover until after the worst point of the SARS epidemic in 3Q 2003 for most aircraft types and classes. After the SARS outbreak, looking at narrowbody aircraft, the market value of a 1988 737-400 and A320-200 fell 14.8% and 42.0% respectively in 1Q 2003 from the previous quarter, while market values for a 1998 737-400 and A320-200 fell 15.1% and 16.7% respectively in 1Q 2003. Market values for a 1998 737-800, which technologically replaced the 737-400, dropped 11.2%. At the same time, Brent Crude prices fell 3.5% from the previous quarter during 1Q 2003.

Generally, narrowbody aircraft values recovered by 3Q 2004 and show no long-term effects from the SARS outbreak. However, there were only limited travel restrictions in place during the SARS outbreak, while travel restrictions in China and internationally during this Coronavirus outbreak have been significantly more extensive, potentially having a larger effect on RPKs than SARS. The immediate reduction in passenger demand caused by these travel restrictions will likely hit narrowbody values slightly less than widebody values, as carriers will rely more on their narrowbody fleets in the reduced-demand environment, particularly in the domestic Asia market.

Widebody aircraft in particular took the brunt of the value hit during the SARS epidemic, as they potentially will in the quarters following this Coronavirus epidemic as well. Like narrowbodies, widebody values recovered by 3Q 2004. The small to mid-sized widebodies such as the 767-300ER and A330-300 showed less volatility than large widebodies. Market values of older vintage aircraft, such as a 1988 767-300ER and a 1994 A330-300, were affected the most, falling 13.3% and 18.8% respectively in 1Q 2003. The newer 1998 vintage 767-300ER and A330-300 market values fell slightly less at 10.4% and 13.6% respectively. With the A330 currently in a soft market, all vintages, but particularly older vintages, could be vulnerable to further market value volatility, as the A330 is a popular widebody in the Asia/Pacific region. The 787, also a popular type in the Asia/Pacific region, could be vulnerable to market value volatility as concerns of overproduction combined with reduced passenger demand might lead to delayed or cancelled deliveries of the type in the near to mid-term.

Large widebodies, such as the 777-200ER and the 747-400 were also heavily affected by the SARS outbreak. Market values for the 1998 vintage 747-400 were hit the hardest by SARS in part because the type was nearing the end of its production run, falling 16.1% in 1Q 2003 while market values for a 1989 vintage only fell 7.7%. This time around, we could see softening of market values for older vintage 777-300ERs, or even the A350-900, as these types are popular on mid to long-haul routes in Asia.

Financial markets took an immediate hit with the shock of the epidemic after the Chinese New Year on January 27th, with the US’s S&P 500 and NASDAQ falling 1.6% and 1.9% respectively, and London’s FTSE 100 Index fell 2.3%. However, so far through the epidemic, the S&P 500 has only fallen 0.16% and the NASDAQ has actually risen 2.0%. Since the Coronavirus was announced, through the end of January, Hong Kong’s Hang Seng Index has fallen 6.7% and Shanghai’s SSE Composite Index has dropped nearly 10.0%.

International airline stocks were also affected, particularly airlines with large international presences and extensive Asian networks. China Eastern Airlines and China Southern Airlines’ stocks have been hit the hardest, both falling around 17.0% during the epidemic, as their networks rely heavily on international routes within Asia and around the globe. The following chart shows how several airlines were affected at various event dates throughout this epidemic, starting December 31, 2019 when China reported a new illness to the WHO, around the weekend of the Chinese New Year, and when the WHO deemed the Coronavirus to be an international public health emergency at the end of January.

Airlines are now more flexible than they were in the early 2000’s, becoming more savvy with capacity and revenue management, making changes to flight schedules just days after the start of the epidemic in response to anticipated drops in demand. Several airlines have cancelled their flights to China altogether, including British Airways, Lion Air, Lufthansa, Air France – KLM, Virgin Atlantic, Delta Air Lines, and American Airlines, with more expected to follow. While cutting flights to and from China might curb the spread of the illness, it could potentially have drastic effects for airlines’ financials. Research conducted by mba’s Forecasting and Modeling Group shows three of the top ten international routes from China to outside of the region by frequency are between China and the United States. United Airlines and American Airlines each serve two of those three routes, with Delta Air Lines serving one route, making them particularly exposed to the travel restrictions. United Airlines is also one of the top ten operators to China by frequency and has taken the largest hit to its stock price so far because of its exposure.

After the SARS outbreak, global financial markets fully recovered within one year, even while continuing to recover from the effects of the 9/11 terrorist attacks. This coronavirus hit during a long boom period for the financial and aviation markets, which may help to mitigate the financial effects of the epidemic on aviation, as most airlines are more flexible and financially fit, and thus more equipped to handle the reduction in passenger demand.  The coronavirus has also affected the manufacturers, as Airbus announced it has closed its final assembly line in Tianjin, China in response to the coronavirus. China’s importance to the aviation industry has grown tremendously since the SARS outbreak 18 years ago, and is essential to many global airlines’ growth horizons, which may make this epidemic that much more painful for the industry. The aviation industry’s fears of an economic downturn ahead combined with the potential severity of this epidemic is likely to perpetuate the rash of airline bankruptcies we saw in 2019, as some financially suffering airlines might not cope with the reduced demand. It would also be reasonable to see a slowdown in aircraft transactions and financings in the near to mid-term, though the ABS and EETC markets might hold solid, as they are more long-term instruments.

The timing of the outbreak is also unfortunate for the industry as the Chinese New Year January 25th, China’s largest travel holiday, was effectively cancelled by the outbreak. According to CNN, in 2019 the Chinese New Year accounted for around 73 million trips by air travel. According to IATA, at the worst of the SARS outbreak in May 2003, RPK’s dropped by about 35% with no travel restrictions by countries. Currently, with the travel ban within China and many other countries limiting travel to and from China, RPK’s are expected to take a sizeable hit. With economic growth slowed to 6.1% in 2019, and resulting reduced passenger demand growth in China over the past two years, if the Coronavirus lasts through the quarter, it could have long-term economic effects, unlike prior health epidemics, as Asia grows to be one of the largest aviation markets in the world.

Hong Kong Airlines on the Brink

Hong Kong Airlines undertook aggressive fleet expansion to launch long-haul low-cost routes. Diminished air travel in Hong Kong, caused by ongoing civil unrest, exacerbated the airline’s problems. To comply with new requirements set by Hong Kong’s civil aviation authority last week, the company obtained a $568 million USD capital injection from the HNA Group. This will allow it to continue operations.

Ups and Downs in the 2019 Air Cargo Market – Part I

In this edition of Morten Beyer & Agnew’s Insight Series, Anna Kopinski, mba’s Senior Associate of Asset Valuations, analyzes how the cargo market has fared in 2019, what aircraft are being used the most—and least—and how different metrics reveal divergent views on the state of the market. Later in this continuing series, she will assess the external factors which may influence the air cargo industry, such as US-China trade tensions.

Key Concepts:

  • The air cargo market’s growth surge between 2017 and 2018 has started to wane.
  • Quarterly fluctuations in global air cargo tonnage conceal the broad trends facing the industry.
  • Claims that a deep decline in air freight traffic is imminent are not supported by the data.

Ups and Downs in the 2019 Air Cargo Market – Part I

A cursory read of the press would have us believe that the air cargo market has been in flux with a deep downward trend this year. Headlines have been shouting that the market is “faltering”, “sliding”, “declining”, and “flat-lining.” And indeed, the numbers look scary: compared to a peak in mid-2017, the growth rates have been trending downward:

Source: CargoFacts, 2017-2019

However, the reality is that 2017 and 2018 had unprecedented levels of growth in the market. When we take a closer look at those numbers, we begin to see that while growth has slowed and begun lagging, it has not really begun to decline in any appreciable fashion. In fact, according to OAG, while 1Q19 saw a rather noteworthy dip in total freight tons, the second and third quarters have seen more total freight tons than ever measured before, with nearly 8 million tons more freight flown year to date this year compared to the same time period in 2018. While it is impossible to encapsulate all trends by all carriers, we wanted to examine how the largers air freight operators were faring quarter over quarter, 2018 vs. 2019. As a cyclical industry, this provides a snapshot of market health. While the largest carrier, Emirates, saw declines in the second quarter of 2019, many carriers saw significant growth in 2Q19, both year over year and compared to the previous quarter. Looking at the dedicated air freight carriers, while there may not be growth, there is no great decline, either. Source: OAG Analyser, August 2019

Finally, it is instructive to look at total freight tons carried by all air carriers over the quarters. Though the numbers fluctuate, the trend remains clearly growing. Source: OAG Analyser, August 2019

In short, as tempting as it is to see this as the beginning of a deep decline in air freight traffic, the data does not substantiate such a negative outlook. Time will tell whether this is the market reaching critical mass, a market correction, or simply a plateau. Over the last few years, operators have taken aging passenger 737s, 767s, and 757s and converted them to freighters. In Part II of this series, we will investigate the equipment being utilized in the air cargo sector and how changes to fleet optimization methods impacts market capacity and growth. In Part III, we will revisit mba’s earlier position that a major hurdle for the freighter market would be the after-effect of trade tensions experienced between the U.S. and China in 2H 2018 and 1H 2019, which could severely derail the upward growth track that the market has enjoyed since 2014. Finally in Part IV, we will take a look back at all of the 2019 air cargo market, and try to ascertain whether delaying tariffs until after the holiday season had any meaningful effect on air freight traffic.

2019: The Year of FFP Re-Privatization?

Frequent Flyer Programs (FFPs) are an increasingly common tool airlines use to generate revenue and valuable customer data. As they were originally crafted as marketing tools, the industry is now witnessing the evolution of FFPs into valuable assets for airlines. In this edition of Morten Beyer & Agnew’s Insight Series, Anne Correa, mba’s Director of Airline & Airport Services, delves into the formation of FFPs for airlines and the noted importance of outside investors in helping airlines stay afloat, especially as FFPs enter a time of transparency and re-privatization.

Originally designed in the 1980s as marketing tools for rewarding customers, FFPs have evolved into very profitable businesses and valuable assets for the airlines.  There are 216 frequent flyer programs (“FFP”) in the world, as of November 2018.  Over the past couple of decades, airlines have experimented with different ownership scenarios in an effort to extract various levels of value.  A small number of these programs have been spun-off from the airline or had a part carved out and sold to investors.  As FFPs have matured alongside a strong-performing aviation industry, airlines are again evaluating the best strategy for one of its most valuable assets. Air Canada is the only airline, to date, that has ever opted to spin-off its entire FFP.  In 2005, Air Canada gradually began selling stakes in its program, Aeroplan, until its ownership was completely under a separate company; AIMIA, Inc.  Private interest in investing in FFPs has expanded globally as airlines have sought additional capital.  AIMIA has since expanded its FFP portfolio to include a 49% share of Aeromexico’s Club Premier and a 20% share of Air Asia’s Big Loyalty.  Virgin Australia sold a 35% share of its FFP to Affinity Equity Partners in 2014 and Avianca sold a 30% share of LifeMiles, its FFP, in 2015.  Etihad also boasts a FFP portfolio, holding a 24% share in Jet Airway’s JetPrivilege and a 75% share in Alitalia’s MilleMiglia[1].  Before AirBerlin declared bankruptcy, Etihad also owned a 70% share in its FFP, topbonus. In addition to private divestitures, airlines have also looked to public issuances to monetize their FFPs. In 2010, LATAM became the first airline to offer shares of its FFP, Multiplus, to the public.  LATAM sold 27% of its share in Multiplus.  In 2013, GOL also offered shares of its Smiles program to the public, retaining only a 57% stake.  Offering shares to the public allowed LATAM and GOL to raise additional capital via the markets while still garnering revenue from their programs.

“Private interest in investing in FFPs has expanded globally as airlines have sought additional capital”

While the sale of interests in FFPs allowed airlines to access much-needed capital to stay afloat, they could no longer fully recognize the benefits of FFPs as a source of ancillary revenue.  Realizing that this arrangement placed them at a significant competitive disadvantage, Air Canada signed a definitive agreement in November 2018 to buy back the Aeroplan loyalty program from AIMIA Inc. for $450 million in cash.  Under the deal, Air Canada will also assume $1.9 billion of Aeroplan miles liability.[1] LATAM has also announced its intentions to buy back the 27% shares from the market and make Multiplus private.[2]  In October 2018, GOL announced it plans to buy out minority shareholders of Smiles and delist the subsidiary.[3]   The recent buybacks from the different airlines show a combination of the strength of revenue generation in FFPs and the cash flexibility desired by the airlines. Some aviation industry analysts are vocal in their wish for more airlines to spin-off their FFPs.  This would create more transparency for the programs and investors could finally understand their true value.  Although airlines are disclosing more information in relation to their FFPs, as required by new revenue recognition standards, it is unlikely these analysts will get their wish for financial detail in the near-term, as the only publicly traded FFPs with transparency into their financials are expected to re-privatize in 2019. Thanks to an increased number of partnerships with long-term agreements that provide large and consistent cash flow coupled with strong traffic growth, FFPs are experiencing unprecedented revenues.  In addition to creating strong profits, FFPs generate large amounts of valuable customer data.  Airlines that were previously willing to forego the flexible use of cash from its FFP are now rethinking their strategies in light of the current economy and the rise in importance loyalty programs have seen in the airline industry.

[1] https://www.cbc.ca/news/business/air-canada-aeroplan-aimia-1.4920551

[2] https://www.reuters.com/article/us-latam-airlines-multiplus-delisting/chiles-latam-airlines-to-take-multiplus-loyalty-program-private-idUSKCN1LL35E

[3] https://www.reuters.com/article/smiles-ma-gol-linhas-ae/brazil-airline-gols-talks-on-smiles-takeover-seen-taking-3-months-exec-idUSL2N1Y318L

[1] It has been recently announced that Etihad plans to return its 75% share in Alitalia’s millemiglia

https://it.reuters.com/article/topNews/idITKCN1OJ1Z8-OITTP

Demand Increasing at Slot-Coordinated UK Airports

Anne Correa, mba’s Director of Airline & Airport Services, explores how slot-coordinated airports in the United Kingdom manage their coveted assets and what airlines are willing to do to gain access.

Landing and departure slots are some of the most important assets in the aviation industry. When the demand to land or depart from a specific airport exceeds the infrastructure’s capacity, there is a value in the slots. IATA defines[1] airports with demand greater than supply as Level 3, or slot-coordinated. Exactly who is able to take advantage of the value attached to these slots depends on the jurisdiction in which the slots reside.

Which are the UK’s slot-coordinated airports?

The United Kingdom currently has eight Level 3 airports.[2] London Heathrow (LHR) is the best-known Level 3 airport in the UK, both within the country and the world, because it is one of the largest airports by passengers globally and has operated at full capacity for so long. It comes as no surprise that aircraft movement growth at LHR is 0% over the last three years.  Heathrow simply cannot increase the number of movements with the current infrastructure.  Airlines must increase the size of their aircraft being used at Heathrow or consider alternative airports.  As air traffic growth puts increased pressure on the existing infrastructure, other airports within the region are seeing an increased interest in their slots.

Source: UK Civil Aviation Authority (CAA), OAG Schedules, Airport Coordination Limited (ACL) for FY 2017 (LHR, LGW, MAN, STN, LTN, BHX, LCY, BRS)

 

How do airlines acquire slots at these slot-coordinated airports?

The traditional way to acquire slots is to go through the slot coordinator, Airport Coordination Limited (ACL), at the IATA slot conferences held twice a year.  At these meetings airlines submit requests for certain times during the season and negotiate with the airport to finalize their schedules.

Alternatively, airlines are increasingly utilizing the secondary market to acquire slots.  The airlines must still formally trade or swap these slots through ACL, but the negotiation can be directly between the respective airlines.  The UK is one of the few countries that currently allow for a secondary market.  In other jurisdictions, if an airline chooses to stop operating a slot, that slot will be returned to the authorities for redistribution.  In the UK, the usage rights of the slot may be passed from one airline to another, at the value agreed upon between the two parties.

Source: Airport Coordination Limited (ACL) as of July 2018

Led by Heathrow, more Level 3 airports are seeing an increase in their slots being traded outside of the bi-annual slot conference.  Since 2008, Heathrow has seen approximately 35 slot trades on average per year.  Slots at Gatwick (LGW) are trading more frequently as airlines have looked for alternatives to Heathrow.  In 2016, we saw the first slot trade at London City (LCY) and in 2017, Luton (LTN) and Stansted (STN) recorded slot trades for the first time.

Some airlines have opted to acquire competition in order to procure additional slots in slot-coordinated airports.  In 2007 easyJet bought GB Airways in part for its Gatwick slots.  International Airlines Group (IAG) acquired British Midland International (BMI) similarly in part for its Heathrow slots in 2012.

Which airlines hold these valuable slots at UK’s Level 3 airports[3]?

Landing and departure slots are some of the most important assets in the aviation industry.  mba expects a demanding road ahead for slot transactions as air traffic growth continues to outpace the available infrastructure in the United Kingdom.

[1] World Slot Guidelines
[2] Bristol Airport (BRS) is Level 3 for night and night shoulder movements 2200 to 0559 UTC from S18.
[3] Full year 2017 data for American Airlines, AerLingus, Blue Air, BMI Regional, British Airways, CityJet, EasyJet, Eurowings, flybe, Jet2.com, KLM, Lufthansa, Luxair, Monarch, Norwegian, Pegasus Airlines, Ryanair, SWISS, Thompson Airways, Virgin Atlantic, Wizz;

Source: OAG (Monarch data included for accuracy however the airline went bankrupt in October 2017)

2018 Farnborough Airshow Results

The 2018 Farnborough Airshow generated impressive results for the commercial sector as both major manufacturers Boeing and Airbus announced a healthy number of new orders and commitments. At the end of the week, Boeing has a slight edge over Airbus with a total of 673 orders and commitments compared with Airbus’ 431. While both the aviation rivals had their share of successes at Farnborough, they will continue to face challenges to keep up with market demand, including engine productivity and overlying trade wars between the United States and China.

An Aviation Rivalry in Flux

Ten years ago, Airbus and Boeing were regularly neck and neck when it came to the backlog of firm orders. However, for the last five years, Airbus has managed to receive more firm orders than its rival, with an aircraft backlog reaching a surplus of 7,000 compared with Boeing’s 6,000 aircraft backlog, at the end of last year. Despite having the backlog advantage, Boeing is slowly increasing its numbers and threatening to bump Airbus from the leading backlog position.

With high hopes for the future, both manufacturers have stated that they intend to reach a set monthly production rate for their leading narrowbody aircraft by the end of next year. Airbus hopes for 63 aircraft monthly for their A320 Family, while Boeing plans to produce 57 per month for their 737. The planned increase in output was announced after both companies recognized the necessity for higher production rates in order to avoid losing their current orders. The biggest challenge for both entities will be making sure the engine manufacturers are able to fulfill their own production goals. Through all of this, the influx of orders and commitments prove that the market is still craving narrowbody aircraft, just as long as Boeing and Airbus can keep up with the demand.

Farnborough Orders & Results

Airbus began the week leading up to the Farnborough Airshow with a year to date total of 321 orders. Before the week closed, the European manufacturer added 93 firm orders and 338 memorandums of understanding (MoUs), increasing total orders and commitments to 431; by comparison, 105 more than the Paris Air Show the previous year. Forty-two of the commitments are for both models of the new A330neo. Another notable agreement came from JetBlue Founder, David Neeleman, who also signed an MoU for 60 A220-300s which he plans to add to a new U.S. carrier. Neeleman’s agreement came shortly after JetBlue placed the exact same order. Through the success of orders flowing in, Airbus Chief Commercial Officer Eric Schulz believes the results show a “strong market appetite for all [their] leading aircraft product families…” covering all models except for their A380, which Schulz believes is now breaking into the second-hand market.

While Airbus had a strong showing in Farnborough this year, Boeing’s time at the airshow was also well spent. Coming in with year to date orders reaching 460 aircraft, they wrapped up their week with a total of 673 orders and commitments, which was 242 more than their main competitor and 102 more than their own numbers at the Paris Air Show in 2017. Seventy-three of those orders and commitments were for their freighter aircraft. These total results cash in at $100 billion, $2.1 billion of which is dedicated to commercial and defense services, while the remaining account is for commercial aircraft. The success of the week, according to Boeing, shows “resurgence in demand for freighters and strong order activity for the 737 MAX and 787 passenger airlines.” Two new customers signed on for the MAX 10 and the 787 alone will soon reach more than 1,400 orders once the commitments from this air show are solidified.

 


Source: Cargo Facts

Evidence of Trade War Impact

An important item to note as the 2018 Farnborough Airshow came to a close is that of the total 1,104 orders and commitments, just over 29% of them were placed by unidentified customers. The first two days alone saw undisclosed customers signing for 180 A320neo Family aircraft, starting the show off on a high note for Airbus. According to Cargo Facts, it is believed that a good portion of those orders were placed by Chinese companies intentionally to mask their moves due to the growing trade war between their country and the United States.

The trade war began after the US tariffed $34 billion worth of items from China, with the looming threat of $500 billion in tariffs. Firing back, China placed tariffs aimed at specific regions throughout the States, especially hitting the Midwest. According to the Washington Post, the country at risk for more economic loss is China, as 20% of their exports are sent to the US. However, China has the ability to withstand more in the coming year due to their political system having an immensely different chain of command compared to the US. This ongoing trade war seems to be the primary reason for an uptick in unidentified customers at the Farnborough Airshow.

The implications of this trade war threaten the aviation industry in the States as well. For example, the 25% tariff on aircraft weighing anywhere between 33,000-99,000lbs greatly affects Boeing’s 737s, which is the most common aircraft in that spectrum. Additionally, 20% of Boeing’s order book is comprised of orders from Chinese organizations, which is where the anonymity of this year’s airshow comes into play. If the trade war continues, the industry could see a noticeable hit to aircraft manufacturer’s profitability, particularly in Boeing’s case.

Future Outlook

Overall, the increase in orders and commitments at this year’s Farnborough Airshow demonstrates the strength of the manufacturers and the positive outlook organizations have for the coming years. While Airbus and Boeing both had strong showings at the event to increase their aircraft backlog, their potential to reach their own productivity goals and fulfill orders remains tied to the engine manufacturers’ ability to meet the demand. Lastly, both organizations must look to overcome the market challenges presented by the US-China trade war.

Grounding the Trent 1000 Powered 787 Dreamliner

787 Trent 1000 Groundings to Increase

With the summer holidays approaching, airline customers of Rolls-Royce’s Trent 1000 engines have expressed their concern with the downing of the 787 aircraft, and now are requesting lease agreements for other aircraft to fill in their gaps. These requests are effectively putting additional pressure onto Rolls-Royce to speed up the process of completing a permanent fix to the problem.

The issue is housed in the Package C variant of the Trent 1000 engine, which came into service first attached to the 787-9 aircraft, with about 380 in use to date. Thus far, 80% of the variant have been put through basic checks for forms of cracking or other signs of deterioration on the intermediate pressure compressor blades. From that 80%, a third of the engines have failed the first round of inspections, under requirements placed by regulators for aircraft who travel more than 2 hours and 20 minutes from the nearest airport they can divert to in case of emergency. Those engines that have failed have been removed from the aircraft so that they can be repaired, a fix that Rolls-Royce has already fitted onto a test engine set to fly in June and hope to be implemented throughout their customer base prior to the previously announced release of early next year.

The current amount of grounded 787 aircraft has reached 30, but that number is now believed to rise to around 50 aircraft, as more enter into inspection. According to the CEO of AerCap Holdings Aengus Kelly, “Now, if the blade fails the inspection, then the engines come off wing, go into the shop… The problem at the moment is that there are not enough spare engines… [and] a number of [the downed 787 aircraft] are our airplanes.” This concern is one of many voiced, and to help expedite the process of implementation of the permanent fix, Boeing has sent an executive to watch over the problem solving among different locations that manufacture the engine, and are currently working on the widespread issue.

787 aircraft with the Package C variant were all produced and delivered before the end of November 2017, upon which time delivery stopped for that specific engine type. The engine variant that took over after the Package C is the Trent 1000 TEN, which was first seen in commercial service on November 23, 2017. Found on mba’s STAR Fleet, the operators with the most active 787s employing the Package C variant Trent 1000 engine include All Nippon Airways (52), British Airways (24), LATAM Chile (21), and Norwegian Air Shuttle (20). Of the 21 that LATAM Chile operates, 11 of the aircraft are grounded due to the compressor blade issue.

According to Rolls-Royce’s President of Civil Aerospace, “we fully recognize the unacceptable levels of disruption our customers are facing… [and] while we expect the number of aircraft affected to rise in the short term as the deadline for the completion of initial inspections approaches, we are confident that we have the right building blocks in place to tackle the additional workload.” However, with the increased inspections, they believe it won’t have additional financial impact on the company, as they are set to reveal their newest restructuring plan on June 15th.

Sources:

Aircraft Value Update and Insights for 2Q 2018

What’s Driving Values in 2Q 2018?

REDBOOK’s ISTAT Certified Appraisal Team Has the Latest:

Relying upon the current market conditions and the aircraft transactions that have occurred over the first quarter and into the second quarter of 2018, mba has updated and released the 2Q 2018 values on REDBOOK. Below you’ll find the highlights from the update and a look into the most highly traded aircraft of the year.

For a look into current and historical data of the entire global aircraft fleet, mba launched STAR Fleet (System Tracking Aircraft Repository) within the REDBOOK platform.

New Additions to REDBOOK

  • 32 new engine variants and types have been added to REDBOOK including the Trent 1000, GEnx-1B64 and -1B70, and the -5Bs and -7Bs with tech insertion.

Aircraft

  • Mid-vintage A320-200 market adjustment factors increased up to 4% for some years including early 2000 builds. Demand for current generation aircraft remains high due to low fuel prices and neo delays.
  • A350-900 and 787-9 Market Values see market increase of 1% above base as operator and lessor appetite remain strong.
  • A320neo and 737 MAX family aircraft continue to see Market Values equal to Base, though Market Lease Rates are trending below the 0.8% lease rate factors historically achieved by new aircraft, averaging closer to the mid-0.6% lease rate range.

Engines

  • PW4060s saw a boost of 2% over the quarter mainly due to the demand from 747-400Fs and 767-300Fs boosting need for spare engines and parts. Values are expected to climb in the short term.

For more updates on the 2Q 2018 Aircraft Market. Please note, non-REDBOOK subscribers will have limited access.

mba’s STAR Fleet Analyzes Aviation in Japan

Japan Aviation Market Snapshot

Powered by mba’s REDBOOK STAR Fleet

Leading up to the 7th Annual Japan Airfinance Conference, mba generated a brief analysis of the Aviation Market in Japan using data from REDBOOK’s recently launched STAR Fleet.

Here are some of the insights derived from the report:

  • Currently 717 aircraft are operated by Japanese carriers
  • 21% of aircraft operated in Japan are leased
  • 62% of the country’s fleet is operated by the top two carriers
  • In 2017, there were 1,101K frequencies and 201.4M seats (each way) recorded in Japan