The year 2020 was the most tumultuous on record for the value of most aircraft types, much worse than the First Gulf War of the early 1990s, the Asian Crisis of the late 1990s, the events of 2001 and the Great Recession of 2008. The very nature of the COVID-19 pandemic inevitably meant that aviation was going to be specifically impacted. As more aircraft were placed into storage, schedules were cancelled, and international movement restricted, aircraft values underwent a significant readjustment with widebodies particularly impacted.
The longer an aircraft remains in storage, the more expensive it is to return to service. The values of some aircraft types – the A380, the B747-400, the B777 – collapsed and the A330 and B777-300ER were already struggling. Narrowbody aircraft values fell by between 15-30 percent and widebodies aircraft values by between 20-45 percent as a result of COVID-19.
The level of discounting applied by appraisers has been varied with some hardly changing values of newer aircraft throughout 2020 while others introduced significant declines as of April. The newer aircraft still in production have suffered the least while aging aircraft no longer in production or reaching the end of their product life cycle experienced the most severe discounting.
Newer aircraft have been placed back into service ahead of older aircraft as these are likely to be the most efficient and most reliable. Entire fleets of older aircraft have been retired by some operators.
The lease rentals for many aircraft types suffered to a greater degree than values with lessors experiencing rental deferrals and repossessions. Lessors have increasingly found it necessary to introduce impairments in their accounts to reflect the loss of value in their assets.
Yet, despite the negativity surrounding 2020, transactions still took place with aircraft being moved between operators, albeit at much lower rental levels, and even power by the hour arrangements. Order cancellations for Boeing’s 737 MAX aircraft were evidence as contracts allowed for cancellation if aircraft were not delivered within twelve months of the agreed delivery date. For Airbus, customers were contractually obliged to continue to receive aircraft resulting in reasonably high delivery rates.
In such market conditions, new aircraft tend to be used as replacement rather than growth capacity, forcing the retirement of older aircraft that much sooner. Some new aircraft were delivered only to be placed into long term storage. Both Airbus and Boeing continue to have completed new aircraft which cannot be delivered for a variety of reasons – COVID restrictions for example or because customers cannot secure financing. For aircraft due to be delivered in 2021 and thereafter, both Airbus and Boeing have inevitably had to accept deferrals which will see a 30-40 percent reduction in production rates. Several customers for the Boeing 777-9 have already deferred deliveries to 2022 and beyond underlining the severity of the crisis.
While there have been various fragmented attempts by the aviation industry to allay the concerns of travelers and governments by instituting testing regimes, only a global vaccination program ever seemed likely to restore international flights. With mass vaccinations now in progress, the latter part of 2021 offers the prospect of a significant improvement in traffic levels - if a valid vaccination verification system is in place.
The longer the restrictions have been in place, the greater the prospect for those with sufficient financial resources will seek to travel beyond national borders. During 2020, whenever a window of opportunity for travel emerged, there was a surge in bookings. Travel to regional destinations will be the first to experience an improvement as little planning is required by travelers.
There will be concern over the extent of facilities that will be open as many hospitality venues may have collapsed or experience a delay to re-opening with COVID-19 related restrictions still in place. This will see a demand for narrowbodies but as bookings increase, seats may be in short supply.
Taking aircraft out of long-term storage takes time, particularly if parked in high humidity locations, and re-hiring crews and ensuring licenses are up to date cannot be easily arranged if simulator time is required. Long haul travel requires lengthy planning for travelers and operators resulting in a lengthier restoration of services. Operators will also be experiencing a change in travel patterns as business travel will be subdued as a result of improved communication, lesser initial economic activity and restrictions on company travel budgets.
The change in market structure will see lesser emphasis on larger aircraft and a realignment towards longer range narrowbody aircraft such as the A321 that can more match supply and demand. As the incumbent operators have contracted operations, then this presents opportunities for new market entrants, particularly those that are able to offer a lower cost base. This will see some demand for narrowbody aircraft that might otherwise have remained in storage.
Despite the improvement in the market, there will continue to be many aircraft that will remain in storage meaning the values of narrowbody aircraft will see only a modest improvement in 2021 although the newest have seen values increasing by some three to four percent during 2020 as more have been returned to service. As the market improves in the coming years, the values of narrowbodies may exceed pre-COVID-19 forecasts as of 2025 due to lesser production rates and increased retirement of older aircraft. Thereafter in the early 2030’s the increased emphasis on a new generation of narrowbody aircraft, powered perhaps by hydrogen, may serve to accelerate the depreciation curve for existing types.
For the widebodies, the values of such modern types as the A350-900 and B787-9 have increased slightly from the lows of April 2020 but will take time to improve further but in contrast to the narrowbodies, future values are still expected to remain lower than pre-COVID-19 forecasts. Operators will be anxious to operate the most efficient aircraft and offer the latest amenities as a means of enticing passengers back to the skies.