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Monday, November 12, 2007

Aircraft Value Review - B747-400: B747-400 Values Achieve Stability After Recent Surge

The last 18 months has seen a significant improvement in values and pricing of the B747-400 as a consequence of the delay in the service entry of the A380 as well as the demand for freighter feedstock.

The development of the B747-8 however, finally draws a line under the production of the B747-400 though orders for the new variant remain scarce. Indeed, reports from Emirates suggests that the passenger version, despite already exhibiting a stretch to the original design, needs further performance improvements. The B747-400, however, was in production for mose than 15 years before deliveries of the passenger version ceased in 2005, a long period for any type. Operators are, therefore, conscious of the type's age profile and the potential opportunities afforded by new aircraft including the A380 as well as the B777-300ER.

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 442 orders while other variants account for 252 more, including 126 (plus 40 -ERFs) original production freighters. The total of 694, 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 10-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 the subsidizing development of other products.

 

B747-400 Vital Statistics
LAUNCH
10/1985
FIRST FLIGHT
Apr-88
SERVICE ENTRY
Jan-89
ORDERS
442 (pax)
DELIVERIES
442 (pax)
AVAILABILITY
2 (pax)
OPERATORS
32 (-400)
ENGINE TYPES
CF6, PW4000, RB211
VARIANTS
PAX, COMBI, FREIGHT
D CHECK COST
$4.2m
ENGINE O/H COST
$1.5-4.0m
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 (2006)
$216-247.5m
TYPICAL DISCOUNT
40%
VALUE Y1990
$43.00m
VALUE Y1998
$79.00m
VALUE TREND
Slight Decline
2009 F/V - Y1990
$34.00m
2012 F/V - Y1990
$22.00m
LEASE RATE - DoM 1991
$570,000 per month
RENTAL TREND
Stable
2009 LEASE RATE -DoM 1991
$460,000 pm
AIRCRAFT RATING
C

The previous commercial success of the B747-400 has been owing, 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 15 years has the international market been 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, at least until the arrival of the B777-300ER and A340-600, 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 use of Premium Economy is also an important consideration when reviewing the interior configuration of the type. The A340-600 and B777-300ER, however, now provide operators with alternative options. The A380 has just entered service later this year and Boeing is developing the replacement B747-8 though orders for the passenger version remain elusive.

Despite the necessity of operating the B747-400 on major routes, the market for the type achieved a level of maturity some 10 years after the initial service entry that contributed to a weakness in the order book.

Where operators have retired earlier B747 variants, the 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. Events at the beginning of this decade 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 made the profit/loss equation even more difficult to balance. The economy afforded by the A380 and B777-300ER have been difficult to resist. Fortunately, the premium-class passenger has re-emerged.

The period 2001-2004 saw a rapid decline in values of the B747-400, contrasting with the relatively buoyant market conditions of the period 1999-2000. The reason for the decline, accelerated by the problems suffered by major carriers around the world between 2001 and 2004, was owing to a product life cycle that was nearing its end. The type became 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 10 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 were compounded by weakness in the international sector. This increased the perception that remarketing the B747-400, for which there exist a limited number of operators capable of supporting the type, had become much more difficult. Even where interest did exist, operators were conscious of the potential cost and time for reconfiguration, running into many millions of dollars and months.

Over the last two years, operators and traders 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 had been acquired at prices of less than $30 million with a view to conversion. The lower pricing accelerated the creation of a B747-400 freighter conversion program such that a number of units are now in service. The freighter conversion program has proven to be an important source of demand for surplus passenger units, helping values to rise. Distressed sale pricing has evaporated and values of $42 million or more have become the norm for early 1990 vintage aircraft that are now destined to be converted to freighters. Such is the lack of cargo capacity that the operators may be willing to pay in excess of $65 million for even early examples of converted B747-400s. The delay in the service entry of the A380 has also played a key role in extending the demand for the B747-400 enabling firstly lease rentals and then values to exhibit a marked increase. The A380 has now entered service and conversion slots for the B747-400 conversion program remain elusive such that values of the type may have reached their peak.

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