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      Aircraft finance: Boeing’s 737 MAX issues delay post-Covid normalisation of aviation market
      TUESDAY, 07/05/2024 - Scope Ratings GmbH
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      Aircraft finance: Boeing’s 737 MAX issues delay post-Covid normalisation of aviation market

      Safety-related production problems at Boeing Co. are delaying the normalisation of the aviation finance sector, partly to the benefit of aircraft-leasing companies, as post-pandemic demand for air travel grows faster than the supply of aircraft.

      By Christian Vogel, Associate Director, Project Finance Ratings

      Airbus SE is also a beneficiary, given the effective duopoly it holds with Boeing in the market for passenger jets, as the European plane maker ramps up production more successfully than its US rival to meet strong demand. Another curious – if likely temporary – consequence of Boeing’s problems is resurgent interest in Airbus’s discontinued A380 superjumbo.

      If we look at narrowbody passenger jets, the full-life market values of the latest models are rising but valuations for Boeing’s 737 MAX 8 are lagging those for rival Airbus aircraft, notably the A321neo (new engine option) but also the A320neo (Figure 1).

      Figure 1: Losing altitude: Boeing 737 MAX valuations slip vs rival Airbus jets (2019-24)
      USD m

      Source: Oriel Consult. Note: neo = new engine option; ACF = Airbus cabin flex.

      Lease-rates running at premium for Airbus narrowbody jets

      Aircraft lease rates tell a similar story in the same segment. They had recovered to pre-Covid levels in mid-2023 before rising more sharply in the fourth quarter of last year and the beginning of this year, with those for Airbus’s A321 showing a relatively steep increase.

      Boeing’s production issues have rippled through the market for some time, over and above the sharp cutbacks in operations that all aircraft manufacturers implemented when Covid lockdowns grounded the world’s airlines in 2020. 

      Boeing had cut 737 MAX production by 20% in April 2019 before suspending it in January 2020 as the Federal Air Administration reviewed the aircraft’s safety after the crashes in Indonesia and Ethiopia in November 2018 and March 2019 respectively. Boeing resumed MAX production in May 2020 but nearly a year later it halted deliveries because of electrical problems in some planes. Supply-chain problems led to further interruptions to deliveries in 2023 before the mid-air cabin blowout on Air Alaska’s recently acquired 737 MAX 9 in January 2024 led to a new FAA probe.

      The US manufacturer’s problems related to the MAX are exacerbating other issues related to its post-pandemic ramp-up in production, notably the shortage of experienced and skilled personnel after more drastically cutting back permanent staff during the crisis than Airbus which benefited from furloughs and part-time employment schemes.

      That said, Boeing’s production issues are having a mixed impact on the aircraft-finance sector. On the one hand, the value of Boeing aircraft in general are potentially under some pressure amid the quality concerns, groundings and maintenance-related downtimes. On the other, the shortage of aircraft is increasing values of Boeing and Airbus planes. In addition, while larger airlines and lessors may be able to renegotiate prices with Boeing, smaller airlines may find this more difficult.

      What is clearer is that Airbus is benefiting more from the tight aircraft market. The company delivered 142 commercial aircraft in Q1 2024 compared with 127 the previous quarter. Boeing, in contrast, delivered 83 planes compared with 157 in the previous quarter, putting the squeeze on those airlines looking to renew their Boeing fleets with new, more efficient aircraft.

      Commercial interest in A380 returns; likely to be short-lived

      Another sign of the tight market is that even demand for Airbus A380s, which the European company has taken out of production, has made a comeback since the end of travel restrictions.

      Unexpectedly large numbers of A380s remain or have returned to service at Emirates, International Airlines Group, Deutsche Lufthansa AG and Qatar Airways, partly reflecting the difficulty of getting new more efficient aircraft types delivered quickly. Emirates, for example, has bought A380s after their initial leases expired to keep them in its fleet. Meanwhile, Global Airlines, a UK start-up, plans to offer transatlantic flights with a small fleet of A380s this year.

      The A380 revival looks temporary considering the high concentration of the active fleet with a few operators – led by Emirates – the very high interior conversion costs for a second-hand purchase and the generally unfavourable operating costs of the four-engine aircraft.

      However, the underlying air travel market remains robust. Domestic and international passenger air traffic overtook pre-pandemic levels for the first time in February, according to IATA, with passenger load-factors close to pre-Covid levels too, pointing to tightening of supply and demand.

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