Rentals Reach Their Zenith

The revival in the fortunes of out of production narrowbody lease rentals appears to be running out of steam despite the absence of more modern equipment. Rentals of out of production narrowbodies have enjoyed substantial gains over the last 18 months, sufficient to recoup much of the decline experienced in...

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The revival in the fortunes of out of production narrowbody lease rentals appears to be running out of steam despite the absence of more modern equipment.

Rentals of out of production narrowbodies have enjoyed substantial gains over the last 18 months, sufficient to recoup much of the decline experienced in the early years of the decade. However, that improvement has perhaps reached its limit as the lease rate factor has edged back to more appropriate levels. The rise in lease rentals has been a consequence of the Ripple Effect, a process that causes both values and lease rentals to experience rapid declines with any weakness in market conditions.

The Ripple Effect occurs when the primary mainstream types are in such short supply that it forces operators to seek less desirable alternatives on a temporary basis. This increase in demand for older types allows rentals a measure of recovery before facing the prospect of further declines when either the production rates of newer types increase, or an industry downturn forces operators to downsize.

The operating lease rates in the table below, provided by The Aircraft Value Analysis Company, on the Web at http://www.aircraftvalues.net, are for indicative purposes only. Rentals are quoted in U.S. dollars per month and exclude maintenance reserves. They assume a medium credit, average return conditions and an average lease term. Lease rentals for actual transactions may differ. European specification, weaker credits and short lease terms may warrant a higher rental.

Narrowbody Dry Lease Rates (Dry) US$ '000s per month - December 2005
Aircraft	Age	Rental	Trend Analysis
B707-320CH	1968-74	10-20	Placing rentals on the B707 is difficult as power by the hour agreements are likely to prevail. The aircraft has long been relegated to third-tier operators. The number of destinations willing to accept the aircraft continues to diminish as noise and emissions concerns become ever more widespread.
B727-100H	1967-71	15-25	The price of fuel has tipped the scales against the B727 as it has done for most older types. The aircraft possesses little attraction to potential operators because of the availability of alternative products. The three-engine configuration combined with engine technology that heralds from the dawn of the jet age makes for not unexpected difficult marketing conditions.
B727-200H	1969-71	15-30	There was a marked improvement in -200 lease rentals, but that occurred more than 15 years ago with no evidence of improvement since.
B727-200HADV	1975-79	30-40	The lease rentals of the -200HADV have barely changed. However, with such potential for differences in term and credit, the range of rentals has been considerable. As the aircraft moves to third-tier carriers, the rental levels are likely to be increasing. With a lease rental that is already low, there is little expectation of a further fall, particularly in the context of potentially higher interest rates emanating from the prospect of oil price-induced inflationary pressures. Younger examples may be capable of securing more than $55,000 per month.
B737-200H	1968	15	The -200 has no relevance in the leasing market.
B737-200HADV	1978-84	30-55	The high price of fuel may be accelerating the replacement process in theory, but the lack of capacity and the low level of rentals in comparison to the B737-300 and B737-700 are such that the aircraft still holds some attraction for a variety of carriers. Its performance and capacity can still offer competition to more modern types except that maintenance, fuel consumption and reliability are taking their toll.
BAe146-200	1984-88	45-70	The market for the -200 remains difficult. Though BAE Asset Management continues to place aircraft, the arrival of new products is making the task ever more problematical. The four-engine configuration may be perceived to be a negative but much has been done to contain operating costs. The issue of reliability is a constant problem that requires considerable attention. The availability of later generation variants is also an issue. Lease rentals are at the point where lower rates perhaps cannot be contemplated by the lessor.
BAe146-300	1988-92	55-80	Though still offering viable competition to others, the market for the BAe146 continues to deteriorate such that lease rentals have weakened slightly. The higher capacity, however, allows for the higher price of fuel to be spread over a greater number of passengers, although the pressure on yields makes the containment of operating costs of paramount importance.
BAC1-11-400	1970	15	Still represents reasonable structural integrity, but has long since passed as a leasing tool.
F28-4000	1977	15-20	The rentals of the F28-4000 are likely to be the subject of some discussion between the lessor a potential lessee. The risk to lessors increases as the filtering process evolves, which can require either a higher lease rental or a higher deposit, possibly both.
Fokker 100	1988-93	40-55	The high price of fuel has consequences for the Fokker 100. The focus on newer equipment has caused a slight drop in Fokker 100 rentals. The market is currently at its peak; this is the time that the Fokker 100 needs to be placed to allow for some measure of return to be elicited from lease rentals. The future beholds only difficulty for the aircraft.
Fokker 70	1994-96	40-50	The 70-90 seat segment of the market now has a number of competitors and rentals of the Fokker 70 have experienced further weakness. There is no prospect of a revival in the prospects of the Fokker 70, although lease rentals have already declined to a level that makes further falls unlikely.
DC9-30H	1968-75	20-30	The decline in DC9 rentals is complete. A rise in interest rates will only result in lower attraction for the aircraft. However, the difficulties facing the DC9 need to be seen in the context of a history that has generally offered good returns for owners and lessors, assuming that investment has taken place at the right time.
B737-300	1985-89, 1990-95	95-130, 110-150	The rentals of the -300 have perhaps reached their peak. The rise over the last 18 months has been on the order of 40 percent. While the increase has perhaps come to a stop, the lack of availability of alternative equipment is likely to allow rentals to remain unchanged for at least another six months. Placement of the aircraft will remain easy, particularly for quality examples. The Ripple Effect continues to work to the benefit of the -300.
B737-400	1989-93	115-155	The rentals of the -400 have also registered a significant improvement over the recent past but there is little possibility of any further rises. There is a growing appreciation that when the availability of newer equipment increases, the demand for the -400 will fall relatively quickly.
B737-500	1991-96	100-140	The 100-seat market remains difficult, at least for those not specifically designed for the segment. At present, the -500 is still held in reasonably high regard, but this is likely to change as more large new regional jets come into service and start to prove their worth. The lease rentals of the -500, for the present at least, are expected to remain reasonably stable, however.
MD82	1982-89	50-80	The lease rentals of the MD80 series have managed to register a slight improvement and there is an expectation of further increases beyond current rates. Those in better condition may be able to attract higher rental levels.
MD83	1986-93	60-105	The MD83 has the payload/range performance that is warranting a slight improvement in lease rentals as a consequence of the Ripple Effect. Though rentals are still languishing behind those of the B737-400, there is still sufficient demand as to allow rentals to remain above $100,000 per month for the more exceptional examples.
Commentary reflects change over the previous three months.