Lessor Dampens Speculation over Airliner Economic Lives

 - October 8, 2012, 10:50 AM
The apparent early retirement of some relatively young aircraft such as the Airbus A318 has prompted speculation about shortening economic lives for airliners that leasing group Avolon claims is ill-founded.

Ireland-based aircraft lessor Avolon is speaking out against what it characterizes as irresponsible speculation that the economic life of modern airliners has been significantly reduced by the dismantling (for parts) of a number of relatively young aircraft, such as the Airbus A318. In an October 2 webcast, Avolon CEO Domhnal Slattery and head of strategy Dick Forsberg presented the results of a study drawing on raw fleet data provided by consultancy Ascend, combined with its own 10-year projections.

“Over the past few years a small number of economically young aircraft have been parted out…and there is a shortage of CFM56 engines in the market, which can make parting out more attractive than leasing,” said Forsberg. But Avolon claims that these transactions have had little impact on aircraft values. “Underlying profiles form a stable pattern and have not changed dramatically over the past couple of years,” the lessor concluded.

The historic trend for 50 percent of airliners to retire after 25 years in service has continued to hold true over the past five years, claims Forsberg. For narrowbodies–the category prompting the most concern after Airbus and Boeing launched the re-engined A320neo and 737 Max, respectively–retirement rates have been no more than 3 percent (A320 family) and 16 percent (for 737-300/-400/-500 Classics) to date. A total of just 130 A320 series aircraft have been retired, with an average age of 18.3 years.

However, Avolon is forecasting the retirement of 8,300 airliners over the next decade, “more than double the recent trend,” said Slattery, who added, “We believe there is no need to change existing depreciation policies” although the “consistent trend over the decades to aircraft retiring later” was, he said, “maturing now in terms of retirement patterns.” The widely used 15-percent residual value assumption is still valid, he asserted.

Forsberg also took a swipe at Airbus and Boeing for increasing production rates to levels that he sees as inconsistent with demand as they fight for market share. He said this has forced engine manufacturers to try to keep up with Airbus and Boeing production rates, which have been taking all their excess capacity and leading to the early parting out of a few aircraft. But he characterizes these cases as “anomalies,” insisting that the market is not about to be “flooded” with cheap spares and that early retirements are not about to become the norm.