Aviation Data

Supply and demand imbalance, wide body machine value under pressure From Cirium

The following is the Supply and demand imbalance, wide body machine value under pressure From Cirium recommended by recordtrend.com. And this article belongs to the classification: Aviation Data.

The value of the wide body machine had already been pressurized before the outbreak of COVID-19, when half of the MV value of the fleet was 95% or more of the base value (BV). Figure 1 shows the change in the ratio of market value (spot transaction price under current market conditions at a certain time point) to basic value (long-term basic value of aircraft under supply-demand balance). It can be seen from the figure that from December 2018 to December 2019, the curve gradually moves to the left, and the decline will accelerate in 2020.

Today, half of the fleet’s market value is less than 83% of the base value, but interestingly, in these two years, one fifth of the fleet’s market value has always been higher than the base value. The reason for this phenomenon in 2020 is that the demand of main cabin wide body cargo aircraft is strong, which makes up for the loss of abdominal cargo capacity of wide body passenger aircraft.

According to the fleet weighted average, in 2020, the market value of the older models with better liquidity (A330, 777-300ER) will drop by 20% – 30%, while the market value of the models with new technology (787 and A350 Series) will drop by 3% – 17%.

Figure 1

Figure 1 also shows the peak and trough of the ratio of market value to base value in the last growth cycle. It can be seen that: firstly, although the cycle span is as long as ten years, the value of wide body machine is still far below the level before the outbreak of the financial crisis; Second, the current MV / bv curve shows that more than half of the fleet value ratio is lower than the trough of the previous cycle (July 2010) – even after considering the impact of the financial crisis on the underlying value curve.

In terms of fleet size, the delivery of the whole growth cycle is significantly higher than the long-term average. Therefore, the overall age of the aircraft is relatively new, and 60% of the wide body aircraft are less than 12 years old.

Looking forward to 2021 and the basic drivers of supply and demand, the supply of wide bodied passenger aircraft is likely to continue to grow, while the demand is still low, which will further pressure the value and rent of aircraft.

Despite a sharp 45% drop in aircraft deliveries by Airbus and Boeing in 2020, aircraft oversupply is expected to remain severe by the mid-2020s. In the absence of sufficient demand, the number of aircraft decommissioning and passenger to cargo conversion is expected to increase. Nevertheless, the number of retired aircraft in 2020 is the lowest since 2009, which indicates that due to the limited demand for second-hand available aircraft materials (USM), some aircraft are still temporarily sealed, and the next wave of dismantling boom may be coming.

The number of sealed aircraft once reached a peak of 14400, accounting for 65% of the global fleet, but since then the number has declined, and there are differences among different aircraft types. The grounded proportion of single channel and dual channel aircraft is 28% and 37% respectively. Supported by freight demand, there are still some aircraft in service, but the number is small. There are still a large number of dual channel passenger planes flying pure cargo flights (mainly using belly cabin, but there are also more than 100 planes carrying lighter cargo in the cabin).

The amount of rent refund is expected to remain at a historical high. As far as possible, the leasing company will extend the lease term and renegotiate the lease, so as to reduce the amount of rent withdrawal when it is due and avoid the situation of unplanned rent withdrawal. As the market recovers, it is expected that the leaseback situation will become more clear, which will bring additional advantages to the leasing companies that take back the aircraft.

As of January 2021, it is understood that in 2020, a total of 61 airlines in the world will go bankrupt, restructure or completely liquidate, involving 1400 aircraft, one third of which will be in order status. The aircraft include 340 wide body aircraft, of which 18 have not yet been delivered.

Despite the downturn in the overall environment, due to the unprecedented financial support from the government, the number of airlines going bankrupt in 2020 is still relatively small. Only when the government no longer provides these financial support, the real operating conditions of the airlines will be revealed. At that time, the number of bankruptcies will rise and the aircraft supply will increase.

Although the airline financing is more difficult, but in the low interest rate environment, the leasing company liquidity is still sufficient. Air Lease Corp, for example, issued $750 million in medium-term senior unsecured bonds at a coupon rate of 0.7%. There is also a lot of private equity to invest in the commercial aviation sector – some of which have entered the market during the downturn. At the same time, some institutional investors have returned to some extent and are about to start further investment.

Figure 2

Figure 2 compares the fleet concentration of various aircraft types with that of Boeing 737-800. It is no surprise that the liquidity of wide body aircraft market is far lower than that of narrow body aircraft market. When the cumulative percentage is less than 50%, the trend of each model curve is similar as a whole, but there are obvious differences in the high proportion range, which highlights the concentration degree of the fleet and the dilemma of the lack of second-hand market for large wide body aircraft.

Before the outbreak of COVID-19, the narrow body machine instead of wide body machine has become a trend of substitution. This trend may continue as airlines seek to optimize asset deployment to maximize occupancy and reduce operating costs. In view of the current oversupply of Airbus A330 and Boeing 777, it is difficult to predict whether these aircraft can all return to the passenger market. As a result, investors have only two options to alleviate the oversupply situation: dismantling the aircraft or changing passengers to goods. The dismantling market itself is facing challenges, with less available funds and insufficient demand for second-hand available aviation materials. In the wide body aircraft market, only cargo aircraft has spare engine demand.

There are also hidden dangers in the market of changing customers to goods. If it is only for financial considerations to change customers into goods without comprehensive demand analysis, then with the recovery of the industry, there may be oversupply of wide body freighters in the next few years.

Aircraft leasing back (or default before the expiration of the first lease) usually leads to oversupply in the market. The book value of many aircraft is too high to be sold to the customer to goods market, which leads to impairment before modification in some cases. In 2021, it is expected that the impairment of wide body machines by leasing companies will increase. In 2020, due to the impact of the market environment, the number of broadband machine impairment is relatively small, but cirium expects that the potential market drivers will promote more broadband machine impairment this year.

The most interesting factor to watch in 2021 is the increase in the supply of aircraft with new technologies, especially the Boeing 787. Although some of these models will be available in early 2020, the overall number is small. Norwegian’s restructuring has ended its long-standing long-range airline business, leaving 35 787s looking for new buyers.

Figure 3

In addition, other airlines in the process of restructuring will also release 110 787s and a350s. In the environment of low demand, the increase of supply will lead to the further decline of aircraft market value and rent. This will further affect the market value of A330 and 777-300ER, as they also face the risk of airlines releasing more aircraft supply due to operational difficulties.

For economic reasons, airlines will continue to operate 787 and A350 in 2021, especially as fuel prices rise. Comparing the number of flights tracked from mid February 2020 to the end of January 2021, we can see that the activity of 787-9 has only dropped by 17%, while the activity of A330-300 and 777-300ER has dropped by 57%. The activity of a350-900 has not been improved well, which is still 40% lower than that of last year. This may be due to the high concentration of A350 fleet in Asia and the strict restrictions on cross-border travel in the region.

Although there are many ways to predict when passenger traffic will return to the level of 2019 (cirium believes that it will not be earlier than 2024), cirium believes that the recovery time of global dual channel aircraft will lag behind that of single channel aircraft by about 12-18 months. Therefore, although the commercial aviation industry will finally usher in a glimmer of light, but for the wide body aircraft market, the light is too weak, cirium expects that the next year will still be full of difficulties. More reading: China novel coronavirus pneumonia: Cirium: it is predicted that air demand will be restored until 2024-2025 years. Cirium:2020 Cirium forecast: Cirium is expected to buy 19%Cirium of production aircraft in the 2019-2038 year: Business Aviation Cirium: in the new crown pneumonia epidemic market environment. What is the change of air traffic during the Spring Festival 2021? Novel coronavirus pneumonia is expected to be sharply reduced in the Cirium: Spring Festival holiday. Cirium:2020 aviation insight trend report Cirium: COVID-19’s April air passenger market demand and supply situation analysis of Cirium: Cirium: the impact of the new crown pneumonia epidemic on business aviation gradually revealed that the total passenger capacity dropped 67% in passenger traffic to 21 years ago: Cirium: the aircraft rental for the second wave. Cirium: domestic aviation market in Asia Pacific region is expected to recover in July

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