Jetrader - Spring 2014 - 18

means more of the price difference was absorbed in used airplane
values than for new airplanes."

Interest Rates
A similar analysis of London Interbank Offered Rate (LIBOR)
values between 2005-2006, when the rate was about 6 percent,
and its recent level of around 0 percent, showed a financing cost
differential over loan term of about $62,000 per month for a new 737700 versus an older 737-300. Translated into product value, it meant
another hit contributing to lower appraised values. "Financiers and
investors realize that long-term interest rates will likely go up, and
this is why they are not discounting used airplanes to the full extent
of the base interest rate decline," Zolotusky said.

Freighter Feedstock
After a long run of standard-body freighter conversions fueled
by the "express letter" business, the advent of the Internet
replaced express letters with email as trucking also became
competitive due to fuel prices. But the same web phenomenon
created Amazon and the need for the "package freighter," which
tend to require more volume and thus consume widebody aircraft.
"Based on historical demand assumptions, we lost 1,100 singleaisle airplanes that went into the parked fleet or were scrapped
and thus never got converted," Zolotusky said. The used widebody
side of the industry, thanks to the likes of Amazon, grew at the
expense of the smaller freighter. Despite the promise of developing cargo markets, like China, future single-aisle conversion rates
are expected to be modest, Boeing said.

Other RV Factors
Boeing's exploration turned up other secondary market insights
that challenge some market views around residual values-like
the belief that new-airplane deliveries to developing regions
like Latin America, Africa, the Mideast or Russia are killing used
airplane sales opportunities.
"It a good myth, but the reality is different," Zolotusky said.
"Historically, old planes actually went to where most of the fleet
was, that is the U.S. and Europe. There were some sales to other
regions like Latin America, but the same trend holds today. For
example, as growth shifts to Asia, more used planes are going
there. Today, used demand is much more balanced around the
world and not as much concentrated."
Zolotusky also reported that regulations placed by some countries on the age of imported aircraft don't seem to make any
significant difference on where older planes land.
"We've found that countries with restrictions actually take
older planes in similar numbers as countries without restrictions."
"Overall, when it comes to impacts to residual values as far as
airplane trading, we concluded that they're clearly under pressure
but not too far off historical norms," Zolotusky said.

Pricing Premium
The jet maker doesn't underestimate the broader concerns of
the aircraft traders over whether the used market is feeling the
pinch from the record new-airplane delivery volume.
"We clearly see that there's pressure on the secondary market.
We believe it'll be here to stay as long as interest rates are low

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Jetrader - Spring 2014

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