How do we approach aviation asset values in a time of crisis?

George Dimitroff analyzes CMV and lease rates for the global fleet during the coronavirus pandemic

Our latest webinar hosted by Rob Morris, Global Head of Consultancy, and George Dimitroff, Head of Valuations,  comprised in-depth review and analysis of the latest updates on the impact of the coronavirus on the aviation market, attracting more than 900 delegates from around the globe. (Access the recording and data presentations here).

Values and lease rates review due to Covid-19

  • Number of transactions is reducing but hasn’t stopped completely
  • Customers asking us after 9/11 values dropped, will they drop this time?

It is vital to remember that values do not drop overnight – the last two downturns took 12-24 months to bottom out. We believe in frequent review and step changes following the market as it moves. And while we don’t always have the luxury of transactional evidence, we pay attention to other indicators including but not limited to.

Part-out values and whether the type has reached that territory
New supply – OEM production rate
Used aircraft availability as advertised
Schedules data for the aircraft type
Liquidity of the asset

Base Values take a long-term view; they are the start of a 20-30-year forecast.  The current crisis, even if recovery takes 3+ years, is a short period relative to the span of the forecast. We cannot make knee jerk reactions to Base Values due to Covid-19 or a global recession – precisely because it is normal for Market Values to be below Base Value during a recession.

While we do not expect to impair any Base Values purely due to COVID-19, the Ascend by Cirium team has adapted its operations to deliver an agile approach to tracking and providing the most dynamic data and expert insights for aviation investors during this global pandemic

Key adjustments and considerations include:

  • Types that already had fundamental problems with their BV forecast before COVID-19 will need to be impaired (Where MV was below BV all through the “good years”)
  • End-of-production twin-aisle types are especially vulnerable
  • Our forecast accuracy analysis published in January suggests every generation of twin-aisle has underperformed our forecasts in most market conditions –twin aisle depreciation rates for all generations will be closely scrutinised (irrespective of COVID-19).

Cirium valuations data capture since start of 2020

Our team is working 24/7 to back our value change decisions with as much data as possible.

  • 674 total rows of data captured YTD (as of 20 April 2020). 126 of these were events in March and April i.e. after COVID-19 became a global pandemic
  • 325 sale-related data points
  • 282 lease-related data points.

Single aisle market value changes

  • Since January – all Boeing aircraft values are down, and the Airbus family is down but the A320neo remains relatively stable.
  • 737 family: relatively small changes to the whole family. Both A320 and 737 had values significantly higher than the base value prior to this crisis. So, the reductions seen so far are bringing the values down to base value or just under base value, based on transactions in Q1.
  • Airbus: the A319 is being hit relatively hard and the A320 is being hit harder than the 737 family.

Lease rates for single-aisles

The reductions are slightly greater for the lease rates – and it’s interesting to see this for the A320neo too. However, this could be because a lot of the lease rates for these aircraft were over heated before the crisis. Now we are in an environment where, if you do have a lease return, it’s going to be difficult to get the previous rates.

Value changes by aircraft type

A320-200 (CFM-5B values)

The fleet weighted average potential decline between Current Market Value to Downside Value for all 1995-2019 vintages is 34%. Please remember our rating is based on a 95th percentile scenario. Potential that market values do go below these rates.

Boeing 737-800

The fleet weighted average potential decline for 1997-2020 vintages is 26%. Why is this lower than the A320-200? The a320 is exposed to older vintages so these are more volatile. The a320 also had their values come up a lot more – a lot of values for the A320 family were 50% above base because of part out values being so high for the CFM56 engines and airframes, so they have more to drop percentage wise.

Airbus A320 neo (P&W)

Fleet weighted average potential decline for all vintages is 13%. Audience in the poll were more pessimistic but based on previous experience, the latest technology aircraft tend to not be impacted as badly. 13% of a 40 to 50 million USD aircraft is a lot of money.

787

Fleet weighted average potential decline for all vintages is 14%. 135 to 140 million USD aircraft so 14% is a large amount of lost revenue.

A350

Fleet weighted average potential decline for all vintages is 12%. On a new aircraft the downfall could amount to $20million.

Please join us for our next webinar in the coronavirus series: The route to a planned and predictable recovery. Register here. 

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