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Monday, April 19, 2004

B747-400 Values Continue to Wobble

Despite experiencing an upturn in demand, values of the B747-400 continue to experience weakness.

Not until such time as the recent interest in the type from such carriers as Thai and Cathay is translated into real acquisitions will there by justification for calling a halt to the slide in values.

The type has been in production for approximately 15 years almost unchanged, a long period for any type. Operators are therefore conscious of the age profile of type and the potential opportunities afforded by new aircraft including the A380. Despite many aborted attempts are designing a replacement, Boeing is continuing to consider alternatives using powerplants designed around the B7E7.

Though there are many real and perceived problems facing the B747-400, there can be no denying the popularity of the type, even accounting for its hitherto monopoly. The passenger B747-400 has accumulated in excess of 451 orders while other variants accounts for 203 more, including over 104 original production freighters. The total of 654, encompassing all variants, is remarkable in view of the high acquisition cost, though most operators can generate sufficient revenue over only two years to cover the capital cost. The breakeven for most aircraft models is around 300 units over a ten year time frame. The B747-400 can therefore be considered a success for Boeing, generating until recently, considerable on-going profitability for the manufacturer and facilitating the subsidy of B777 development.

The previous commercial success of the B747-400 has been due in no small part to the market structure and the absence of a direct competitor. The type is most suited to serving intercontinental routes with dense international traffic. The international arena has been heavily regulated since the end of the Second World War, largely dictating the frequency and size of aircraft on most scheduled routes as well as fare structures. In such an environment, the B747 has established a presence that is synonymous with international travel.

Only within the last fifteen years has the international market become sufficiently liberalized to stimulate new market opportunities for operators. The fragmentation of international routes has generated demand for smaller aircraft capable of serving secondary city pairs. However, even in this era of greater competition, the lack of slots and higher charges at major airports has ensured the need for aircraft with the greatest capacity. Operators seeking to lure the higher yielding business and first class traveler have also found that the B747-400 remains virtually the only type capable of supporting a true three class configuration and able to support a multitude of interior arrangements. The arrival of the A340-600 and B777-300ER, however, now provide operators with alternative options.

Despite the necessity of operating the B747-400 on major routes, the market for the type achieved a level of maturity that contributed to a weakness in the order book. Of the 451 passenger -400s ordered, only 14 remain to be delivered and it remains doubtful that all of these will find their way to customers.

Orders in recent years have been extremely limited underlining that the market for the type has possibly reached saturation, at least for the B747-400. Where operators have retired earlier B747 variants, the availability of B777 and A330/A340s have represented an alternative and sometimes more viable means of meeting the demands of a changing market structure that requires a mix of widebody capacities. September 11th 2001 and subsequent have made market conditions extremely difficult for international scheduled operations where 70 percent of revenues are generated by 30 percent of passengers. The dispersal of high yielding passengers to premium economy sections, corporate jets, and dedicated business class aircraft have made the profit/loss equation even more difficult to balance.

The last few years have seen values of the B747-400 decline reasonably quickly, contrasting with the relatively buoyant market conditions of the period 1999-2000. The reason for the decline, accelerated by more recent events, has been a product life cycle that is nearing its end. After some 13 years of production and something of a mature market, the type has become vulnerable to replacement imperatives. Most major operators prefer to maintain a youthful fleet for marketing, financial and maintenance purposes. A young fleet allows operators to more easily take advantage of technical developments; selling aircraft while the type is still in production is likely to see better residuals than after production has ceased; after ten years, the maintenance burden increases and fuel efficiency declines compared to when new and in comparison with current engine models.

The traditional problems associated with a mature product and customer base have been compounded by weakness in the international sector. This has increased the perception that remarketing the B747-400, for which there exist a limited number of operators capable of supporting the type, has become that much more difficult. Even where interest does exist, operators are conscious of the potential cost and time for reconfiguration, running into many millions of dollars and months. The hitherto cost of acquiring new B747-400s has reflected the greater flexibility enjoyed by Boeing due to the large number already delivered and absence of amortized development costs.

The engine manufacturers have also become more anxious to secure orders for existing types knowing that spares revenues over the life of the engine will outweigh a low initial installed engine price. The low net price secured by B747-400 customers, most of who have ordered multiple units, is unlikely to pay a high price for used units. Operators capable of supporting the B747-400 are also conscious of the opportunities afforded by the A380 and the only incremental improvement in the B747 being considered by Boeing. Replacement of the existing B747-400 therefore increased, initially potentially outstripping supply. More recently operators of the B747 have shown renewed interest in the type as both freighter and passenger, partly because of a reluctance to acquire new examples.

Older B747-400s are already being offered at values of less than $40 million. The lower pricing has accelerated the creation of a B747-400 freighter conversion program such that the first unit is expected to emerge next year. The freighter conversion program is likely to be an important source of demand for surplus passenger units, helping values achieve a measure of stability in the medium term.

The very problems that currently beset the B747-400 are unlikely to show any reversal even with improved market conditions. The improvement in airline profitability will encourage operators to seek replacement rather than complementary equipment.

B747-400 Vital Statistics
LAUNCH
10/1985
FIRST FLIGHT
04/1988
SERVICE ENTRY
01/1989
ORDERS
451 (pax)
DELIVERIES
437 (pax)
BACKLOG
14 (pax)
OPERATORS
35 (-400)
ENGINE TYPES
CF6, PW4000, RB211
VARIANTS
PAX, COMBI, FREIGHT
D CHECK COST
$4.2m
ENGINE O/H COST
$2.0m
STANDARD MTOW
800,000lbs
OPTIONAL MTOW
875,000lbs
FUEL CAPACITY
53,765usg
FUEL - OPTIONAL
57,065usg
RANGE (high MTOW)
7,260nm
No. of PAX
21/77/322
CARGO
6,025ft3
CRUISE SPEED
507knots
MZFW-STD
535,000lbs
MLW-STD
574,000lbs
CABIN WIDTH
239.5inches
LIST PRICE (2002)
$185-211m
TYPICAL DISCOUNT
35%
VALUE Y1990
$41.00m
VALUE Y1998
$87.00m
VALUE TREND
FALL
2009 F/V - Y1990
$24.00m
2012 F/V - Y1990
$17.7m
LEASE RATE - DoM 1991
$450,000 per month
RENTAL TREND
SLIGHT FALL
2009 LEASE RATE -DoM 1991
$360,000 pm
AIRCRAFT RATING
B--

 

Aircraft Asset Assessment: The B747-400

Market Presence. The B747-400 represents the core of many major carrier fleets around the world. Performance, economy and capacity have remained unmatched and have come to represent the baseline by which all other types are judged. In designing the A380, Airbus had to reduce operating costs by some 10-15 percent compared to the B747-400, a task that proved difficult even with the aid of a greater seating capacity. Despite the positive attributes of the type, the last few years has seen an erosion of traditional B747-400 values as a result of a changing market structure and product life cycle. Alternative widebodies, albeit with lower capacities but featuring similar business class opportunities have proved popular on new and existing routes where operators have sought yield improvement rather than market share.

Market Outlook. However, while the B747-400 is experiencing considerable problems in terms of value weakness, there are some positive factors that could at least prevent a continued fall in short term values. The reluctance or inability of operators to order new equipment at least between now and the arrival of the A380 could see increased demand for used examples, evidenced by the recent announcement by Cathay to acquire used units.

Any problems experienced in developing the A380 resulting in a delay are unlikely to be viewed in the same way as if the market was buoyant. Traffic is already rebounding in most markets and with limited deliveries expected in the near term and acceleration in the retirement of older equipment, international operators may even face something of a shortfall in capacity. This could potentially see a demand for the B747-400 to cope with such a shortfall.

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