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B737-800 Values On the Up As Deliveries Fall by Nearly 50 Percent

Values of A320 family members, the A320 in particular, continue to be buffeted by sustained levels of production, a partial cause of the significant number still in storage or being advertised for sale or lease.

The year 2003 saw a very modest decline in A320 family deliveries, 236 in 2002 versus 233 last year. The Airbus narrowbody total was partially boosted in 2003 by the service entry of the new A318 of which nine were delivered. By contrast, deliveries of B737 Next Gen aircraft fell massively from 223 to only 173 units, representing a near 25 percent decline in a single year. In 2001 Boeing [NYSE: BA] delivered just shy of 300 B737s compared to 257 A320 family members.

The ability of Airbus to maintain production at the same levels, whether a recession or boom time presides, has clear implications for values of used equipment. The Airbus rationale for maintaining such a number of deliveries stems from market demand. The aircraft manufacturers are in the business of making new aircraft, the primary source of revenue. If Airbus can sell new A320s, it should and will do so. Turning business away as a means of stabilizing the used market in which it has little financial involvement would be seen as inappropriate in most other industries, particularly where volume has such a marked effect on costs. Airbus also needs revenue to fund the development of the A380.

In registering fewer deliveries in 2003, Boeing may be reflecting other priorities - establishing shareholder value or reducing costs, for example. Any new orders for the B717 would have been gratefully received by Boeing no matter what the impact on the used market. There is also perhaps a desire on the part of Airbus to finally achieve parity with Boeing in terms of deliveries rather than just orders, the benchmark that the U.S. manufacturer has previously seen as the more important but now seemingly dismisses as the Europeans secure the larger slice of the pie.

Whatever the rationale of Airbus, over 30 percent of A320 deliveries were made to lessors suggesting that any responsibility for the weakness in used values should be spread among a number of parties. Only 20 percent of B737-800 deliveries in 2003 were made to similar lessors. The order from Qantas for new A320s for its new low-fare operation, Jetstar, could have been met from the parking lot, perhaps at an overall lower cost and that much sooner.

There are currently over 50 A320s still listed as being in storage and availability, in terms of units being advertised for sale or lease, has reportedly risen over the last few months. Storage levels have barely changed over the last 12 months. Airbus delivered 119 new A320s during 2003, a net increase of three units compared to the 116 deliveries made in 2002. A319 deliveries fell from 85 to 72 units, comparable to those made by Boeing for the B737-700.

There are currently no B737-800s listed as being in storage and deliveries fell from 126 units in 2002 to only 69 in 2003, although -700 deliveries rose from 73 to 80 respectively. Only nine B737-800s are being advertised for sale or lease, although the collapse of Sobelair may add to this total.

As a percentage of existing fleets, availability levels represent 4.5 percent for the A320 but only one percent for the B737-800. Equilibrium for mainstream narrowbodies in production is considered to exist when availability is at three percent, suggesting that used A320 values should be exhibiting some weakness and those for the B737-800, relative strength. In the context of such a number of A320s being available, values, and more specifically, lease rentals, have been adversely affected. Values have failed to register an improvement during the latter part of 2003 despite the rising market.

The shortage of B737-800s by contrast has seen an improvement in used values and lease rentals. The difficulty in finding short-term delivery slots may be an issue in forcing an improvement in used values and rentals.

The year 2004 is expected to see Airbus delivering a similar number of A320 family members suggesting that availability will continue to remain three percent, unless there is a rapid improvement in market conditions. Boeing is expecting to see a slight rise in delivery rates for 2004, but with the B757, B767 and B747 all likely to face tough times, any rise in overall production rates has to emerge from increased B737NG production.

The comparison in terms of levels of availability for the A320 and B737-800 may not be fair. The Airbus product has been in production for nearly twice as long as the Boeing type and there are many more in service. The quantity in service and the age profile of the A320 lends itself to a certain level of availability, just as there are a significant number of B767-300ERs on the market but very few A330-200s. With the oldest A320s being some 15 years of age, there will be growing desire by operators to replace such aircraft which feature rising maintenance costs and less advanced engines with new equipment, all the more so in the current environment of relatively low rentals. Leasing a new A320 today can be less expensive than it was in 1990, and much less in real terms. Rentals of new A320s in the late 1980s were around $325,000 per month, a level that would be seen as very attractive by lessors today.

The A320 has been the subject of a number of unfortunate corporate collapses which has contributed to on-going availability. The demise of Swiss, Sabena, Aero Lloyd have seen a number of A320 entering the market. The relatively youthful B737-800 has not seen the same level of availability, although a great many are used by the still weak U.S. majors