B787 Delays Places Further Upward Pressure on B767 Rentals

Values of First 40 B787 Placed "On Watch" The six-month delay to the service entry of the B787 will place further upward pressure on the lease rentals, and indeed values, of the B767-300ER. The final assembly of the first B787 has been delayed by five months and flight testing by a further month...

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Values of First 40 B787 Placed "On Watch"

The six-month delay to the service entry of the B787 will place further upward pressure on the lease rentals, and indeed values, of the B767-300ER.

The final assembly of the first B787 has been delayed by five months and flight testing by a further month. The delivery of the first B787 was scheduled for May 2008 but will not now occur until the end of 2008. While the flight test program has been extended by one to seven months, this is still shorter than the original eight-month timeframe. Even with around-the-clock flight testing, there remains a possibility that certification may take longer than Boeing has announced.

Customers of the B787, encompassing those scheduled to receive their aircraft in the early part of production as well as those seeking later deliveries, will have already agreed to sell or end leases on existing equipment to make way for the B787. With the continued expansion of international services, operators will now need to retain existing aircraft for longer than anticipated. Lease extensions now have to be sought for some B767-300ERs, as well as other widebodies. Lessors will therefore be in the left hand seat when determining the rates for lease extensions. Rates can be expected to temporarily rise, albeit on the basis of shorter terms. Owing to the potential for further delays to the B787 beyond that announced by Boeing, operators may be seeking to extend leases for longer than the six months already announced. This will place further pressure on an already tight market. Rates nudging $700,000 per month can be expected.

The demand for the B767-300ER has been extraordinary over the course of the last two to three years. Lease rates have doubled from under $300,000 per month to approximate $600,000 per month. Values have also experienced a notable reversible of fortunes. The price in 2005 for an early 1990s B767-300ER may have been $20 million but the same aircraft are today being marketed for more than $30 million. The delay to the B787 will further increase the attraction of all B767-300ERs. The delay to the service entry of the MD11 and B747-400 in the late 1980s also saw a significant improvement in DC10 and B747-200 values though this, too, coincided with exceptional traffic growth at the time.

The improvement in lease rentals and values goes beyond the more desirable B767s featuring relative youth and high maximum take off weights and instead encompasses those examples with lower weights and less attractive interiors. The highest MTOW for the B767-300ER is 412,000 lbs though most feature a weight of 407,000 lbs. Some however, have a weight of less than 390,000 lbs which limits their payload/range capability. While such lesser specification may have previously necessitated a significant purchase incentive to attract buyers, such is demand and absence of those with higher weights, that lessors and brokers are able to command higher and near comparable pricing. The first B767-300ERs entered the market nearly 20 years ago which suggests that, in terms of age alone, the earliest examples may be close to being scrapped. Some younger B777s and A340s are seemingly already destined to be parted out. Yet the scrapheap will have to wait for the B767-300ER, not least because of the demand as both passenger and freighter.

The current improvement in B767-300ER values and lease rentals is expected to be the final recovery period for the type. The rise in lease rentals and values is lasting longer than expected owing to the exceptional price of fuel and demand for greater fuel efficiency in the form of the B787 which has created an extensive backlog. The delays to the service entry of the B787 has further extended this period of buoyant market conditions. However, just as with the DC10-30 and B747-200 in the early 1990s, once the new aircraft is delivered in quantity at a time when the market may not be so healthy, the B767-300ER will not be so sought after. Lease rentals will therefore inevitably suffer and the fall will be all the more apparent in the context of the coming rise. Nonetheless, for those owning or seeking to trade B767-300ERs, the current market seems to offer the greatest rewards.

Values of first 40 B787s Become a Concern.....

The delay in the service entry of the B787 is not necessarily a problem for the first examples off the production line but the decision to continue building aircraft during the flight test program has raised concerns (AVN, September 17, 2007).

During the delay to the service entry of the B787 Boeing and its subcontractors, or risk sharing partners, will keep on building. Over 20 aircraft were originally scheduled to be produced during the flight test program but with the delay this could increase to nearly 40, or more should there be a further delay. With such an all-new aircraft the flight test program is certain to highlight problems. Software for example can delay certification such as with the Embraer E-Jet. The flight control software for the B787 should have been installed in August but only an interim solution is currently being used.

The problem has been exacerbated by the extensive use of subcontractors who produce major portions of the B787, allowing Boeing to essentially assemble the complex jigsaw puzzle. A need to rectify existing components by shipping back to the original manufacturer will not be an option. Also subcontractors will be manufacturing components and sub- assemblies considerable ahead of the final assembly program undertaken by Boeing. While Boeing has made considerable inroads to tracking the status of each airframe, where a number of modifications as a result of flight testing, there may exist significant differences to the specification of the first batch of aircraft off the production line. For example, some initial B747-400s are not suited to freighter conversion which impacts their value. Should the first 40-50 B787s feature lesser or different specification than later examples, those aircraft delivered in the first six months of the program may experience differing current and future values.

The combination of the decision to continue to build aircraft during the flight test program of an all-new aircraft and a desire to shorten the actual flight test schedule from the original eight months to seven months may yet produce new challenges for Boeing and the financial community. Just as with airline timetables, Airbus eventually learnt, with the A380, that it was better to be more conservative in estimating the time needed to fix problems, thereby offering customers an earlier than expected delivery time and turning a negative into a positive.