Posted May 12, 2009 10:55 AM
By Jake Reppert
The Low Down on Values and Lease Rates
I wanted to take the chance to put up a few graphs that do a great job of displaying the difference between older and newer technology, specifically, I wanted to show the relationships between values and lease rates, and how aircraft near the beginning of their useful lives behave differently to those near the end.
The graphs below include, Market Values and Lease Rate Factors (both indexed to their respective 2002 values), as well as in service fleets.
Source: Ascend Online Fleets and V1 Values Database
Source: Ascend Online Fleets and V1 Values Database
IN SERVICE POPULATION
The first dynamic to highlight is the in service fleet. The 737-800 is newer technology, and as such has an in service population that is growing, and continues to grow throughout the downturn. Conversely, the 737-500 is technology that was essentially replaced by the 737NG family, and we see that the in service population of the -500 seems to be highly dependant on market conditions. The above graph captures part of the decline in population due to several events at the beginning part of the decade, and the parkings/scrapings due to the current economic downturn can be seen very clearly through 2009.
Where the in service fleets for the -800 grow steadily through the early part of the decade, and even through the current downturn, Market Values are much more volatile. The graph of the -800 market values clearly shows the impact on values as the demand for air travel contracts and expands.
On the other hand, Market Values for the -500 only decline during the considered period, and seem much more stable then the in service fleet.
LEASE RATE FACTORS
Perhaps the great equalizer to some degree, the lease rate factor (Lease Rate/Market Value) is percentage of the Market Value that the Market Lease Rate accounts for. So, with a lease rate factor of 1.00, it would take 100 lease payments to equal the Market Value.
The Lease Rate Factor for the -800 moves opposite to the Market Value up until the current downturn, at which point they both began to decline together, suggesting that trends in the markets for both buying, and leasing aircraft are moving in the same direction.
Lease Rate Factors for the older -500 have been either steady or experienced growth during the considered period. What we see here can be accounted by a Market Value that is declining at a greater rate than Lease Rates.
WHAT DOES THIS MEAN?
This analysis is essentially the beginning of understanding certain strategies in the aircraft trading community. There are lessors who deal with only new, only old, and both new and old technologies, for those relatively new to the sector this would be a good jumping off point, to the rest of you, you have my apologies for the re-run.
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