The acquisition of five used B747-400s by Dragonair and the potential purchase of three more by Aerolineas Argentinas points to continued stability for values of this aircraft and, indeed, potential improvement overall.

Values of the B747-400 have been struggling ever since United Airlines [UALAQ] placed eight PW4000-powered B747-400s onto the market 18 months ago. Thai Airways initially showed some interest in the equipment, offering a reported $50 million each for surprisingly young equipment. Despite the quantity involved, the distressed nature of the sale, and the absence of any actual purchase, pricing inevitably became the benchmark for all B747-400 values.

However, there have been more legitimate reasons for the fall in B747-400 values. The rationale for a fall in used -400 values has stemmed from the arrival of the A380, the longevity of B747-400 production, the problems at United and Air Canada, the surplus generated by SARS, the Iraq war and global recession, the service entry of alternative equipment, and deep discounting on new -400s. Singapore Airlines is intent on disposing of a number of -400s to make way for new equipment in the coming years. Such availability has added to the perceived weakness in values.

The market however, has improved considerably over the last year. The economy has recovered, SARS has been largely treated, demand is beginning to outstrip supply and high- yielding traffic has begun to emerge once again. A number of operators have already expressed an interest in the freighter conversion program and units are already slated for modification. Dragonair has acquired five Singapore Airlines aircraft for conversion to special freighter usage during the course of the next four years. Cathay Pacific Airways had previously indicated a double-digit requirement for used B747-400 capacity for both passenger and freighter use. As mentioned, Aerolineas is now seeking to acquire three used units.

The recovery in the Asian markets, in particular, and the more than two-year gap before service entry of the A380, are likely to result in a shortage of widebody capacity. Operators are likely to seek a short-term solution to the capacity shortfall and acquire used B747-400s. While aging in technological terms, the B747-400 still represents the mainstay of many fleets and additional used units would dovetail with existing equipment, crews and maintenance.

The combination of freighter and passenger use for older B747-400s will enable values of this aircraft to achieve a measure of stability. The heavy discounting exhibited last year is dissipating to the degree that the virtually distressed pricing of $30 million-$35 million will become increasingly difficult to achieve. Pricing in excess of $40 million for early B747-400s is expected to become more the norm, thereby matching values more closely.

The impetus for a short-term improvement in pricing may actually be derived from the short-term scramble for used units, leading to a shortage over the next few years. The very emphasis on securing bargain-basement pricing could be the catalyst for a rise, due to the reversal in supply and demand. Any increase in pricing is expected to be short-lived, and by 2007 there will be another period of considerable discounting.