Widebody Values Start to Benefit From Improving Asian Market

The improvement in Asian market conditions has resulted in Singapore Airlines (SIA) issuing Requests for Proposals (RFP) to Airbus and Boeing, and points to the potential for a short-term improvement in widebody values. In the wake of the Iraq War and SARS, SIA had previously put on hold its...

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The improvement in Asian market conditions has resulted in Singapore Airlines (SIA) issuing Requests for Proposals (RFP) to Airbus and Boeing, and points to the potential for a short-term improvement in widebody values.

In the wake of the Iraq War and SARS, SIA had previously put on hold its fleet-replacement program for primarily 30 Boeing B747-400s and 51 B777s. SIA has for decades been at the vanguard of aggressive fleet replacement and a hefty depreciation. The suspension of plans for the acquisition of new widebodies underlined the severity of the problem facing carriers in Southeast Asia. Asian carriers had become the powerhouse for widebodies, but the regional crisis of the late 1990s, the fragility of the Japanese economy, the events of Sept. 11, 2001, and the various crises of 2003 all contributed to a crumbling of demand. Fortunately, the rapid expansion of Middle Eastern carriers prevented widebody values from facing further discounts.

There is still some concern over the strength of demand and yields. However, the SIA decision to restart the fleet-replacement process comes quickly on the heels of the announcement by Cathay Pacific that it is seeking a large number of B747-400s from the used market for both passenger and freighter use. Both these airlines were severely rocked by the SARS outbreak last year but both seem to have recovered remarkably quickly. Even bird flu has failed to affect traffic growth.

SIA is viewed as an ideal target customer for the B7E7, suggesting more widespread demand in the region for widebodies. The availability of the B777-300ER and A340-500/-600 is expected to be slight in the short term, due to very recent service entry. The service entry date of 2006 for the A380, and the yet to be officially launched B7E7, will cause any demand to be met by supply from the used market. Even the supply of used A340-300s now appears to be have been exhausted. Operators will also be loath to place new orders for the B767 and B747.

The re-absorption of surplus units will aid short-term values for widebodies. Just as important will be the reluctance of operators to dispose of existing equipment as early as previously planned. SIA, for example, may prefer to retain B747-400s beyond next year, at least until the arrival of the A380. However, SIA still has eight B777s and two A340s on order, which may provide some flexibility should previously agreed to extension options be perceived to be unattractive.

The B747-400 in particular has been facing tough times in the last year as United Airlines [UAL] and Boeing placed a number on the market at seemingly heavily discounted prices. The recent decline in -400 values has still been significant. With the arrival of the A340-600 and B777-300ER, as well as an acknowledgement that the product lifecycle of the passenger B747-400 has all but come to a close, there has been further downward pressure. The perceived demand for used units, as well as growth requirements and a service entry date of 2006 for the first A380s, offers the prospect of a temporary reprieve for values of the B747-400.