Increased new aircraft production, the emergence of aircraft age restrictions in many countries, engine OEM support, and limited financing are major barriers to remarketing used aircraft according to an expert panel speaking at the ISTAT Americas 2013 conference in Orlando.
“Placements are much more challenging today than in the past,” Bristol Associates president Pete Seidlitz said Monday.
Lease rates are getting very low, so in many cases it makes better sense to lease out the engines and part out the airframe, he said.
Plus, for such low rates and return on investment, it becomes easier to part out an aircraft than redeploy it, which would entail new paint, maintenance, etc.
And, these barriers are leading to part outs of younger and younger aircraft, according to GA Telesis president and CEO Abdol Moabery. His company recently “prematurely” parted out a relatively young Airbus A330 and Boeing 777. These younger part outs started with 737NGs because these aircraft are sometimes available at prices where teardown is more feasible, Moabery said.
However, Moabery said this was a blip and not a trend. “There is potential for market change and aircraft values could go up again.”
Financiers are therefore starting to use lower life limits, which is leading to higher lease rates, smaller residual value, and narrowed amortization tables to 15-20 years from 20-25 years. Depreciation has become a series of cliffs—at five years, 10 years and 20 years—rather than the traditional smooth line.
Historically, the passenger-to-freighter conversion market was a viable option to extend aircraft life, and panel members expect that to continue with narrowbody aircraft. However, widebody options are not available because no option exists for many models, including the 777, A340 and A380.
As such, several hedge funds are becoming more involved in financing end-of-life aircraft.