Jetrader - Spring 2014 - 17

to continue. Meanwhile, that opens up opportunity for the
capital markets, which have demonstrated a huge appetite
for airplane investments and are stepping up accordingly,"
Myers said.
Boeing's forecast anticipates that 2014 will see source volumes
in an almost even balance in helping meet industry's needs (see
Chart 2: Sources of Financing for Boeing Deliveries).
"We're expecting many newcomers to join the established
players in the bank space in a much more global mix and the
leasing sector continuing to evolve in both sheer numbers of
players and their market competitiveness," Myers said. "Also, the
capital markets have opened their doors to overseas customers as
well as to its traditional U.S. base. This wouldn't be happening
if the markets didn't have a fundamental belief in the strength
of air-travel demand and the product value of new, fuel-efficient
planes as fuel prices remain high."

Secondary Softness
While Boeing's forecast deals primarily with new-plane financing, it also notes improving signs in used-aircraft financing after
several years where higher fuel prices and other economic factors
disrupted the balance between the new and used jetliner markets.
"If there's an industry buzz this year, it's around the anxiety
we're seeing in the secondary market," said Kostya Zolotusky,
BCC's lead market forecaster and its managing director of capital
markets development and leasing.
In recent years, the jet maker helped tackle the industry's
concern over the issue of whether aircraft economic life is changing by sharing Boeing's methodology for concluding it's not. To
help alleviate concerns over whether high production is fueling
airliner oversupply, Boeing also has analyzed data to conclude
that's not the case and that current global demand is genuine.
"This time, we're looking at what's happened to the balance
between new and used airplanes over in the last five years, and
there seems to be good reasons behind the softness we have
experienced in the secondary aircraft market," Zolotusky said.

Exploring Market Friction
Boeing's study of the state of the secondary market began by
looking at plane transactions over the last three decades (see
Chart 3: New Deliveries vs. Used Airplane Transactions on pg. 19).
"It appears that the delivery cycle strength for new planes
is inversely correlated to the movement of used airplanes in the
airlines' fleet," Zolotusky said. "Those movements seem to reflect
the health and strength of the secondary market and indicate
that the market has a way of balancing itself in terms of supply
and demand."
Boeing looked at data including inflation rates, interest
rates, environmental factors, fuel costs and market cycle
trends to conclude that several key drivers explain the recent
years of secondary market softness while the new-airplane
market prospers.

Fuel Price Shifts
According to the company, jet fuel price increases over time,
not surprisingly, have had significant effect on airplane operating
costs. Zolotusky points to the example of the popular 737 family.

Chart 1: Aircraft Financing Environment
2007

2008

2009

2010

2011

2012

2013

2014

Leasing Companies

Capital Providers

Y/R

Y/G

Commercial Banks

Y/R

R/Y

Y/G

G/Y/G

R/Y

Y/G

Export Credit Agencies

G/Y

Y/G

Y/R

Private Equity and Hedge Funds

Y/G

Tax Equity

G/Y

Y/G

New Sources of Funding

G/Y

Y/R

Capital Markets

Airframe and Engine
Manufacturers
Satisfactory

Cautionary

Major Concern

The company's assessment of the aircraft finance market for 2014 pegs
the primary sources as being more balanced and healthier as economic
conditions overall continue to improve and global aviation works again
toward record new-airplane deliveries. (Boeing graphic)

Chart 2: Sources of Financing for g
Boeing Deliveries
g
$60B
Forecast for 2014

Cash

Capital Markets

Manufacturer

Bank Debt

Export Credit

Lessor Financing

Lessor Self Fund

29%

$40B

25%

33%

11%
3%
18%

$20B

34%

2004

Airplane Deliveries
BCA Revenue

24%

14%

26%

29%

19%

24%

28%

31%
29%

30%

28%

29%

22%

18%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

290

394

441

375

481

462

477

601

635-645*

$23B

$28B

$33B

$28B

$34B

$32B

$36B

$49B

$51-53B*

20%
2003

15%

18%

25%

$0B
2002

7%
5%

29%
3%
19%

30%
32%

30%

26%

16%

According to Boeing's latest financing market forecast, funding for its
2014 jetliner deliveries is expected to be marked by lower reliance on
export credit agency (ECA) financing, rapid expansion of the capital
markets and balanced sources for lessor financing.

"We looked at a new 737-700 and a 15-year-old 737-300. They
both carry the same number of passengers. However, when fuel
moved from $2 a gallon to $3 a gallon, the monthly fuel burn
delta was nearly $35,000. Applying the same economics to the
airplanes' value, it translates into about $3 million. Either a new
plane is worth $3 million more or a used one $3 million less,"
Zolotusky said.
A study of 737-300 appraisal data resulted in a similar
value conclusion.
"Appraisers in 2005 said a 737-300 was worth about
$15-16 million and would depreciate along a curve to be worth
about $12 million in 2012. Our 2013 review found it depreciated on
a difference curve to be worth about $8 million. We think the fuel
price delta explains most of that value change," Zolotusky said.
He anticipated the question of whether pricing for the new models are in line with the strong demand and record builder backlogs.
"It's reasonable to ask why the new plane didn't become more
valuable. Market competitiveness pressured new plane prices. That
Jetrader * Spring 2014 17

Jetrader - Spring 2014

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