Value Disconnect Emerges Between Old & New Widebodies

The values of newer widebodies are beginning to surge due to a number of factors while older types are increasingly being displaced.

For widebody values to stabilize or increase, overall demand has to exhibit a considerable swing in fortunes. The Covid Event has created the most significant and longest lasting depression in international traffic ever seen since the dawn of the jet age. To reverse such a deficit takes time with a sporadic recovery process. While the narrowbody sector is seeing strong demand, partly because regional and domestic travel takes far less planning for passenger, operators, and airports, than trips involving long haul, the intercontinental sector that warrants the use of widebody aircraft has yet to experience a recovery of the same magnitude.

Yet, even the domestic and short haul sectors are facing problems with Breeze in the U.S. becoming the latest to announce reductions in routes during the Northern Hemisphere summer which serves to underline the difficulty in re-establishing the intercontinental network. British Airways, SAS and other operators are also experiencing disruption due to industrial action as staff. British airlines are being instructed to reduce their flights by some ten percent and KLM at Schipol by a greater amount.

Traffic remains considerably below pre-pandemic levels. As of April IATA (not all airlines report to IATA) reported that domestic traffic was still some 25 lower with international traffic being over 43 percent lower than same month in 2019. Since April traffic has increased not least as travel restrictions have eased but accompanied by staffing issues. The problems at airports and in terms of flight cancellations has already had a negative effect as passengers avoid flying.

The airlines have been re-introducing ever greater amounts of capacity such that as April global domestic capacity was still down by just over 20 percent but international capacity was still nearly 40 percent lower than April 2019. Again, since April there has been a market improvement but not to the extent of achieving a sufficient swing as to permit widebody values to recover. Such a chasm between pre and post Covid capacity and traffic clearly illustrates the reason why it is not reasonable to consider that widebody values have returned to pre-Covid levels.

Yet, the momentum in the recovery is evident but other forces are at play in favoring newer widebodies. International traffic in particular is still not expected to match pre-Covid levels until at least 2024. Even then this needs to be in the context of what international traffic was expected to have been as of 2024 having lost nearly five years of growth.

The rise in international traffic is therefore very much in evidence but airlines are meeting the challenge by re-introducing newer aircraft types with older types languishing. The rise in the price of fuel has made it all the more essential for operators to select more modern and efficient aircraft. As of June 2019, the price of jet fuel in the U.S. was $1.88 a gallon. In June 2022, the price had risen to $4.1 a gallon. But the rise in the price of fuel also needs to be seen in the context of a stronger dollar for some currencies.

The exchange rate for the U.S. dollar to Pounds Sterling has changed from $1.35 to nearly $1.20. This adds to the financial burden of operators and makes it even imperative for newer aircraft to be operated. While the pent up demand is allowing operators to raise ticket prices, there is a ceiling after which any further price rise impacts traffic. As competition intensifies, operators using older aircraft will find the expense of operating older aircraft less viable.

There appears to be a possibility that Putin’s War will be sustained for some time but this may allow the energy market to re-organize such that prices fall. A ceasefire seems unlikely given that this will probably only provide an opportunity for Russian forces to regroup and launch a fresh assault either again in Ukraine, in Moldova or elsewhere in the region, even the Baltic states. The closer relationship between Russia and China further complicates the longer-term consequences of the invasion of Ukraine an on-going war.

In contrast to the financial crisis of 2008, environmental issues are remaining high on the agenda. Given the focus on SAF as a means of meeting the carbon challenge in the short to medium term, more modern aircraft engines are able to use a greater proportion of SAF. The issue remains the cost of SAF and the ability to source such fuels. The high cost alone makes it ever more essential for the fuel to be used on the most efficient of aircraft – not the least efficient.

With the inability to staff additional aircraft and the need to make the best use of the most efficient aircraft, this means that fewer aircraft will be used more intensively. The more modern aircraft are the most reliable and less maintenance intensive with warranties reducing operating costs when compared to older aircraft. Over time, wear and tear on the engines as well as patch repairs that add to drag may see the operating costs of older aircraft increasing by some five percent compared to when the aircraft was first delivered. More modern avionics will also aid more efficient flight planning. All these factors favor the newer widebodies.

The inflationary pressures are greatly adding to the delivery price of new aircraft. The cost of new aircraft is therefore rising at a faster rate than has been seen for decades. To a large extent the last decade has seen only a modest increase in the value and price of new aircraft due to low inflation and economies of scale but this is now changing. The value of a new A350-900 has seen a jump in the last six months, partly because of the partial recovery of international travel but also due to the effect of inflation and low production rates. Customers have shied away from placing large scale orders for widebodies over the last two years not least because of the lack of money and traffic.

As international traffic increases exponentially, the inability to secure delivery slots in the next few years will see a further swing to an imbalance in the supply/demand equation thereby increasing values of those widebodies in production. The hiatus in B787 deliveries is coming to an end and the B787-9 and -10s set to be delivered in numbers will be used to displace older types. Some operators will however, be forced to bring some older aircraft back into service to meet demand – Lufthansa and Korean are both set to re-introduce the A380.

While the market for older widebodies has been in evidence to some extent, this is largely because of how inexpensive they are when compared to pre-Covid pricing. The values of some aircraft have collapsed and this has created opportunities for new market entrants. The issue though is that there is little possibility that the values of most out of production widebodies will recover because of the above factors.

The dash for freighter conversions is not only because of demand in the airfreight sector – however transitory it may be – but is also a function of just how low either book or market values are for out of production widebodies. With international traffic still 30 percent lower than pre-Covid levels then the surplus of older widebodies makes it difficult to place such aircraft in their primary role.

Whereas starting a new airline using a single or perhaps two B737-800’s is relatively straightforward particularly when focused on the domestic market or specific bloc such as the EU, the same cannot be said when starting intercontinental operations from scratch. The net effect of the current and future market is that the value of new widebodies such as the A350-900 and B787-9 are set to rise further such that by 2024 the value of a new example will likely more match pre-Covid levels of $145 million or more.

However, the lack of efficiency of older widebodies will see a continued decline in value increasing the void between new and old. The value of a A330-300 built as recently as last year is fortunate to exceed $50 million which compares with a value of approximately $90 million or more for a new A330-900; the value of a new B777-300ER built in 2021 has a value of less than $80 million versus $130 million for a new B787-9 today. The conjunction of positive factors for new widebodies is all evident. This is already translating into a significant rise in values with older widebodies set to be displaced in ever greater numbers.