Higher B767-300ER Rentals Shroud Deteriorating Values

Limited -300ER Backlog Points to Tough Times for Residuals The lack of availability of Boeing [BA] B767-300ERs and higher lease rentals for this aircraft can only momentarily obscure the fact that production of the B767 is winding down and that residuals, particularly those of the youngest examples, are...

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Limited -300ER Backlog Points to Tough Times for Residuals

The lack of availability of Boeing [BA] B767-300ERs and higher lease rentals for this aircraft can only momentarily obscure the fact that production of the B767 is winding down and that residuals, particularly those of the youngest examples, are likely to experience a marked fall in the near term.

The conversion of two B767-300ER orders to B777-300ERs by All Nippon Airways [ANA] is representative of the move away from the B767 to other aircraft types. The B767 backlog now amounts to only 25 units. Of the 25, 13 are for the -300ER, six for the -200ER, five for the -300F and a single unit for the -400ER. Production rates of the B767 have been falling rapidly during the last 12 months. In 2003, 24 units were delivered. This would have wiped out the existing backlog. In 2004, only nine B767s were delivered. This compares with 12 deliveries of the recently can expecting that the U.S. Air Force tanker order would sustain B767 production for many more years, but it appears less likely that the company will be able to secure the contract. Airbus is now proposing to build the tanker in the United States should it receive all or part of the order.

New commercial orders for the B767 have also been elusive. Only 11 were received in 2003 and nine in 2004. With existing customers switching orders to alternative aircraft, the fate of the B767 appears sealed. The reluctance to place new B767 orders also stems from the launch of the B787, which is diverting customers to other models.

When deliveries fall below 15 per annum for two consecutive years, then there is a strong likelihood that in the third year, cessation or cancellation will be announced. Closure of the production line will then be affected in the fourth year. This year, B767 delivery rates are expected to be similar to those of 2004, suggesting that in 2006 Boeing will announce that production, at least in a commercial form, will cease in 2007. Such an event is all the more likely due to the arrival of the replacement B787. In contrast to some past programs, there may be no overlap in production between the B767 and B787. As of 2007, Boeing may therefore be manufacturing only the B737-700, B737-800, B777-200ER and B777-300ER, compared to Airbus' production lineup of the A318, A319, A320, A321, A330-200, A330-300, A340-500, A340-600 and A380.

The effect of program cessation on B767 values should have already been mostly taken into account in existing residuals. The current appetite for the -300ER has led to an appreciable improvement in lease rentals. There is a danger that the renewed, albeit temporary, popularity of the -300ER may obscure the consequences of production cessation on values. Values of the oldest -300ER examples built in the late 1980s are fortunate to exceed $20 million.

Those built in the mid to late 1990s may have values in excess of $40 million but a more realistic view would suggest values should be nearer $30 million. The values most at risk of a sizeable depreciation in the coming years are for those B767s delivered in the very recent past. An annual fall of 10 percent or more may become the norm beginning next year for such examples. Fortunately, those customers placing orders in recent years will have attracted a substantive discount, and delivery prices are likely to be well below $70 million. In the short term, at least, lessors should be able to secure sufficiently attractive lease rentals as to mitigate some of the downside associated with the deterioration in values.