Absence Of Orders for -600 Benefit -500 Prospects

Values of the -500 have experienced a continued decline in the last few years due to a changing market structure that has increasingly favored either smaller or larger equipment. Yet, unless there is a surge in orders for the -600 in the near future, operators will be hard-pressed to find pre-owned...

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Values of the -500 have experienced a continued decline in the last few years due to a changing market structure that has increasingly favored either smaller or larger equipment.

Yet, unless there is a surge in orders for the -600 in the near future, operators will be hard-pressed to find pre-owned replacement for the roughly 390 -500s that remain in service. The B737-500, of which 389 were ordered and delivered prior to the cessation of production in 1999, is part of one of the most successful jet families ever built. The B737-500 was the last and smallest member of the now B737 Classic family to be launched.

The B737-300, while a highly successful descendant of the B737-200ADV, was nonetheless too large for a number of operators seeking to upgrade from the Stage 2 model. The B737- 500 was developed as a way to offer operators similar capacity to that of the B737-200ADV. With the 389 orders over a decade, the aircraft can be considered to have achieved reasonable popularity, with Continental, United and Southwest representing the significant customers. Along with Lufthansa, Air France and Air Nippon, the six airlines operate more than 220 -500s, or more than 60 percent of the total -500 fleet. This concentration offers difficult placement prospects should one of the fleets be placed on the market.

The relative success of the -500 is also due to the absence of a direct competitor. Only with the introduction of the A318 has Airbus been able to offer a direct alternative. The A319 entered service in 1996 but matches the B737-300 in terms of capacity, while the Avro RJ100 offers slightly smaller capacity, as does the B717. If operators did not wish to increase capacity, the choice would lie between the aging B737-200ADV and the B737-500. With no competition, the numerous orders for the B737-500 are perhaps unsurprising. The regional jet manufacturers are, however, now on the verge of offering 100-seat products.

Offering seating for 108 in a two-class configuration, the -500 entered service in 1990, about six years after the 128 seat -300 and three years after the 146 seat -400. Shortening rather than stretching an existing design usually results in a relatively heavy aircraft and the B737-500 is no exception. The benefit of shortening is a substantive increase in the power-to-weight ratio compared to the baseline -300, and the retention of fuel capacity serves to improve payload/range capability. The purpose-built nature of the B717 and the stretching of the Avro RJ to the RJ100 presented lower-weight aircraft but at the expense of payload and range performance. Shortening however, creates benefits for engine reliability. The B737-500 is powered by the CFM56-3C1; the more powerful CFM56-3 is used predominantly on the B737-400.

On the -500, the -3C1 engine is de-rated to either 18,500 lbs. or 20,000 lbs. thrust, placing less wear and tear on the engine and offering potentially greater time between overhauls. Engine reliability exhibits a close correlation with operating temperature. Aircraft that have been stretched usually force engines to be used to their maximum, increasing operating temperatures at take-off.

While the B737-500 has secured a reasonable number of orders, the restricted number of customers highlights the problems associated with this market segment. Both the larger and smaller airframe manufacturers have been loath to fully commit resources to developing dedicated models. The 100-110 seat segment has proved to be an elusive holy grail for operators and manufacturers. Such aircraft straddle the needs of both major and regional operators, satisfying only a few.

The aircraft is too heavy for regional operators, conscious of the relatively high weights that can lead to higher airport and navigation charges; the range capability is too long and seating capacity too great to encourage frequency. For the major operators, the -500 is too small to cover considerable overheads. The seating capacity is just sufficient to cope with services between major city pairs but its size fails to make the best use of airspace or scare airport slots.

The problems associated with straddling market segments are also encountered by the B717, A318 and B737-600; orders for all three types of aircraft are failing to engender optimism over residuals, particularly as the new breed of large regional jets threaten to dominate a sizeable portion of the limited potential 100-100 seat market. However, the upside to the more limited capacity of the -500 lies with its ability to offer major operators a way to develop new routes without damaging fleet integrity. Developing new routes often involves thinner traffic in the early months or years, eventually generating sufficient traffic to justify the use of a 120 or 150 seater.

In the two years prior to 2001, values and lease rentals of the -500 enjoyed something of a revival. Despite the cessation of production, the expansion of regional services, particularly by major airlines in Europe, served to stimulate demand for used capacity, essentially acting as a stopgap measure until the arrival of the A318 from 2002 onward. The aircraft released by Braathens were soon snapped up by the likes of British Airways, then eager to expand its regional subsidiaries operating from secondary airports.

With neither British Airways nor Air France opting to renew the narrowbody fleet with Next Generation B737s -- but both already operating B737 Classics -- the B737-500 represented a logical interim solution. Since 2000, the restructuring of major airlines, particularly in Europe, has placed less emphasis on regional expansion and instead has focused on maximizing yields on established dense profitable routes. Demand for the -500 has therefore declined more recently, causing rentals and values to fall back to more realistic and expected levels.

B737-500 Vital Statistics
LAUNCH	05/1987
FIRST FLIGHT	06/1989
SERVICE ENTRY	02/1990
ORDERS	389
DELIVERIES	389
BACKLOG	0
OPERATORS	35
ENGINE TYPES	CFM56-3C1
VARIANTS	Pax.
D CHECK COST	$1,200,000
ENG O/H COST	$650,000
STANDARD MTOW	115,500 lbs
OPTIONAL MTOW	133,500 lbs
FUEL CAPACITY	5,311 usg
FUEL - OPTIONAL	6,295 usg
RANGE-TYP PAX	2,420 nm
RUNWAY LENGTH	8,840 feet
CARGO	822 cu ft
PAX (MAX)	138
MZFW-STD	102,500 lbs
MLW-STD	110,000 lbs
CABIN WIDTH	139 in
LIST PRICE	n/a
TYPICAL DISCOUNT	n/a
VALUE Y1990	$8.9
VALUE Y1999	$15.9m
VALUE TREND	Declining
2009 F/V - Y1990	$5.1m
2009 F/V - Y1999	$10.7m
LEASE RATE- DoM1992	$120,000 pm
RENTAL TREND	Stable
2009 LEASE RATE -DoM1992	$90,000 pm
AIRCRAFT RATING	C

 

Aircraft Asset Assessment: The B737-500

Market Presence. The -500 has a limited market presence. There are currently only five -500s in storage, although six are being advertised for sale or lease. Though only 2 percent of the fleet is being advertised, lack of availability is no justification for assuming high current values and strong residuals. With cessation of production has come an appreciation that values and lease rentals of older B737s face identical problems to other types, the B737-500 being just as much a commodity as the MD80. As an out of production Stage 3 narrowbody, residuals of the -500 are no longer so assured. The limited operator base and the potential placement of a large number on the market in the coming years provides sufficient cause to carefully assess prospect for future values.

Market Outlook. The events since Sept. 11, 2001, have not led to 120-150 seat operators scrambling to acquire used 110 seaters to compensate for the fall in traffic. However, short-to-medium residuals of the -500 have at least experienced some benefit from the restructuring of the major operators. The difficulties being experienced at British Airways and the delays to the A318 program allowed the carrier to place less emphasis on replacing existing B737-500s with new equipment. This allowed lessors to secure at least modest lease extensions to existing leases, preventing spillage of surplus units onto a still difficult market.

In the medium term however, the recovery of the market can be expected to lead to renewed interest in the A318 and even the B737-800, as well as the new generation of larger regional jets. This might be sufficient to overshadow the B737-500 and cause values to decline more rapidly than what might currently be anticipated.