A380 Aids Short-Term B747-400 Rentals

Slide in Delivery Schedule Has No Effect on A380 Values The six-month delay on the delivery of the first A380s is expected to see renewed, albeit short-lived, demand for the Boeing 747-400, allowing lease rentals a measure of further improvement. The delivery of the first of 12 A380s to Qantas will now take...

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Slide in Delivery Schedule Has No Effect on A380 Values

The six-month delay on the delivery of the first A380s is expected to see renewed, albeit short-lived, demand for the Boeing 747-400, allowing lease rentals a measure of further improvement.

The delivery of the first of 12 A380s to Qantas will now take place in April 2007 instead of late 2006. The slippage in delivery will similarly affect all customers with early production slots. The original schedule had called for 11 A380s to be delivered in 2006 followed by 30 in 2007 and 25 in 2008. The number of deliveries in 2007 and 2008 will therefore now increase.

The delay in delivery has had no detrimental impact on A380 values. Most new programs, particularly all new models, including the B747, suffer some degree of delay. The point at which there may be some impact on values is when the delay is caused by a need to undertake major changes to the design, as with the Saab 2000. The A380 represents a major program such that there are certain to be a number of snags that require rectification and therefore a modest delay.

The principal financial impact of the delay will be on A380 customers and more particularly Airbus. With a delay in delivery possibly affecting 15 aircraft, Airbus will be losing the benefit of nearly $2 billion in completion funding, representing perhaps $50 million to $100 million in additional interest charges for the manufacturer. As is normal for most contracts, Airbus will be liable for the delay and customers have already indicated that they will be seeking to invoke penalty clauses. The nature of penalty clauses will likely cover the need to extend existing leases or to acquire additional short-term capacity, as well as compensation for many other expenses committed to the introduction of a new type. Assuming that penalty payments relate simply to the cost of extending leases on existing B747-400s for an additional six months on 15 aircraft, this could easily cost Airbus another $50 million to $75 million. The six-month delay could cost Airbus the price of at least one new A380.

The principal beneficiary of the delay will be B747-400 lease rentals. The short-term nature of the slippage in delivery will have little impact on values for the type. The lease rentals of the B747-400 have already exhibited a marked improvement over the last 24 months, rising from $400,000 during the glut of 2002-2003 to nearly $650,000 today. Adjusting for interest rates seen in the late 1990s, the $650,000 today nearly equates to the $1,000,000 per month recorded during the heyday of the B747-400. There are however, still approximately 12 B747-400s listed as being in storage. This compares with 13 in October 2002. The current storage total includes three United Airlines aircraft; three from Singapore Airlines; one from Air Canada and three from Boeing. Some of those listed as being in storage will perhaps be in between operators, perhaps undergoing reconfiguration or awaiting conversion.

Despite the still sizeable number of -400s in storage, the delay in the delivery of A380s is expected to result in a further opportunity for lessors to extract higher lease rentals for their aircraft, particularly those seeking an extension of six to 12 months. Should Airbus be responsible for the additional lease rental expenditure, lessees will perhaps be more flexible on pricing. The extension to existing leases may be difficult to entertain as a number of B747-400s are already earmarked for conversion to freighter. A delay of some six to nine months may mean losing a conversion slot, an increasingly scarce resource in view of the mounting backlog. The loss of a conversion slot needs to be weighed against the possible $4 million to $5 million additional revenue stream coming from a six-month lease extension.

Any increase in lease rentals emanating from the delay in A380 deliveries will be short-lived. The subsequent release of -400s and increase in A380 production rates will soon result in a realignment of rentals. n