One Engine, Two Engines, 3 Engines: Fishing for the Impact on Values Adam Pilarski, AVITAS, Inc. IATA Maintenance Cost Conference, Sept 11 th, 2014
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Engine Choice & Value Retention ENGINE CHOICE & VALUE RETENTION Page 3
Contents Theory Art of forecasting residual values Analysis and results Page 4
ENGINE CHOICE & VALUE RETENTION Theory Page 5
Depends on interested party Engine manufacturers One is enough Aircraft manufacturers More is better, Bigger market Airlines More is better Leasing companies Mixed, desire for vanilla but bigger market Page 6
Al Baker stressed that he wants choice. We have said that to Boeing and Airbus. We want a choice so airlines are not with their back against the wall from a commercial perspective. Aviation Daily July 17 th, 2014 Page 7
Robert Martin, CEO of BOC Aviation stressed that he is happy with having only one supplier on the A330 Neo (Rolls Royce). As a lessor I much prefer one engine type. You don t have a split market. Aviation Daily July 16 th, 2014 Page 8
Steven Udvar Hazy wants engine choice. The market is big enough for two engine options he said, adding that he was disappointed that GE wasn t involved Hazy says ALC sees a demand for up to 1,200 A330 Neos Page 9
CIT s Jeff Knittel also argued for one engine Page 10
If Airbus goes ahead with it, we d prefer that they stick with just one engine type, says McClelland. From a lessor s point of view, it s not clear that the supposed benefit of lower acquisition cost from a second engine choice outweighs the ease of future placement that comes from having just one engine. Furthermore, it s not clear that the market for an A330 Neo would be large enough to sustain two or three engine programmes. Page 11
Chief Operating Officer Customers John Leahy downplayed the significance of only having one engine supplier on the A330 Neo Rolls Royce and its Trent 7000. He says the only reasons airlines want two suppliers is so that they can get a better deal on the engine. But we have taken the liberty to negotiate a good engine price with Rolls Royce for all customers in advance Leahy said. Aviation Daily July 21 st, 2014 Page 12
We tried hard to have an engine choice (on the A330 Neo), Tom Williams, EVP Programmes, Airbus said. Page 13
Art of forecasting residual values ENGINE CHOICE & VALUE RETENTION Page 14
Why should we care? Pay correct price for the airplane Obtain financing, liquidity Reduce cost of financing, reduce risk Get opportunity for upside gains Page 15
Analysis and Results ENGINE CHOICE & VALUE RETENTION Page 16
140 Nominal Price ($ mil) Aircraft Transactions in Current Price 120 100 80 60 R² = 0.0262 40 20 0 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 Source: AVITAS's transaction database. Page 17
250 Price in 2013 U.S. Dollar ($ mil) Aircraft Transactions in Constant Price 200 150 R² = 0.0075 100 50 0 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 Source: AVITAS's transaction database. Page 18
Inflation matters So does original price Page 19
1.4 Percent of Value Retained Aircraft Residual Value 1.2 1.0 0.8 0.6 Regression on aircraft age variables R² = 0.8251 0.4 0.2 0.0 0 3 6 9 12 15 18 21 24 27 30 Source: AVITAS's transaction database. Page 20
1.4 Percent of Value Retained Aircraft Residual Value 1.2 1.0 Regression on aircraft age, aicraft characteristic, and market related variables 0.8 0.6 R² = 0.8648 0.4 0.2 0.0 0 3 6 9 12 15 18 21 24 27 30 Source: AVITAS's transaction database. Page 21
0.8 Comparing Estimation Residuals of Aircraft Residual Value Analysis Percent of Value Retained 0.6 0.4 0.2 0.0-0.2-0.4-0.6 Residual, Regression on aircraft age Residual, Regression on aircraft age, aircraft characteristic, and market related variables -0.8 0 3 6 9 12 15 18 21 24 27 30 Source: AVITAS's transaction database. Page 22
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Airplanes included Study of the Effect of Engine Options on Aircraft Retained Values Airplane Types Included in the Study 727-100, 727-200, 737-100, 737-200, 737-300, 737-400, 737-500, 737-600, 737-700, 737-800, 747-100, 747-200, 747-300, 747-400, 757-200, 757-200EM, 767-200, 767-200ER, 767-300, 767-300ER, 777-200, 777-200ER, 777-300, A300B2-200, A300B4-100, A300B4-200, A300B4-600R, A310-200, A310-300, A319-100, A320-100, A320-200, A321-100, A321-200, A330-200, A330-300, A340-300, AVRO RJ-100, AVRO RJ-70, AVRO RJ-85, BAC 1-11-200, BAC 1-11-400, BAE 146-100, BAE 146-200, BAE 146-300, DC-10-10, DC-10-15, DC-10-30, DC-10-40, DC-9-10, DC-9-20, DC-9-30, DC-9-40, DC-9-50, F100, F-28 Mk4000, L-1011-1, L-1011-100, L-1011-200, L-1011-50, L-1011-500, MD-11, MD-81, MD-82, MD-83, MD-88 Page 24
Population considered Total delivered One Engine Two Engine Three Engine Narrowbody 22,119 14,190 7,939 N/A Widebody 7,579 2,251 1,951 3,377 Page 25
Observations Narrowbody 2,368 Widebody 653 Timeframe 1970-2013 Page 26
Study of the Effect of Engine Options on Aircraft Retained Values STATISTICAL MODEL Function % Retained Value = f(economic, market, and aircraft related variables, engine option dummy) R-squared 0.86-0.88 Narrowbody Results Coefficient of engine option dummy Sales Price (in 2013 USD) 0.02-0.05 $0.1 - $85 mill, Average $22.1 mill R-squared 0.76-0.77 Widebody Results Coefficient of engine option dummy Sales Price (in 2013 USD) 0.05-0.06 $0.1 - $ 235 mill, Average $53.2 mill Page 27
Summary Preliminary indications are that engine options enhance average aircraft resale values Impact circa $400,000 to $1M for narrow bodies and $2.5M to $3M for wide bodies Page 28
Cycles Explained in Musical Terms
Things are wonderful Airlines finally profitable Low interest rates Money looks for investment opportunities Fuel prices stable Hence Huge orders Huge deliveries Huge backlog Hence Talk of serious production ramp-up by both Airbus and Boeing
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