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Monday, February 6, 2006

DC10-30 Values Approach Scrap Levels

Values of the McDonnell Douglas DC10-30 have continued to falter as a consequence of age, fuel consumption and higher operating costs.

By way of comparison, the current fortunes of the Boeing [BA] B767-300ER harken back to the late 1980s when the rapid expansion of the international market, eagerness to participate in aircraft financing and the delay in new product development caused values of the DC10-30 to almost double to nearly $40 million. As the market shows signs of becoming overheated again today, the values of the B767-300ER could suffer the same fate as the DC10-30 in the 1980s and face a virtual collapse.

The revival in the fortunes of the DC10-30 came and went in the latter years of the 1990s, never to return. The type has been experiencing an ever-increasing number of permanent retirements over the last five to seven years. At the peak in the late 1980s, there were some 235 DC10-30/-40s in airline service. By the mid 1990s, this had declined to 215. But by the end of 2005 the figure had been reduced to only 49 units, exclusive of freighters. Retirements have numbered at least 20 per annum for the last six years. At current rates, there could be no DC10s in service by the end of this decade.

While a number have been converted to freighters, there has been less enthusiasm than originally anticipated, increasing the weakness in passenger values. However, due to the overall demand for cargo capacity, there has been some appetite for the DC10-30 freighter. There are only four -30Fs being advertised for sale or lease and only a single -30.

As the aircraft approaches scrap values, there remain a few loyal supporters, although most of the original operators have long since moved to newer and more versatile types.

Manufacturing of the DC10 began in January 1969 and assembly of the first aircraft commenced only six months later. By roll-out, the number of orders and options for the DC10 amounted to 237. This belated success contrasted sharply with the fortunes of the Tristar, which suffered from a paucity of orders in 1970. The range of 5,900 miles soon made the -30 the most popular DC10 variant, proving much more attractive to a wide range of international operators seeking equipment for use on routes that were unable to support the B747. The development of the -30 was undertaken at the same time as the -10, and marketing centered on the European carriers. The competition between the L1011 and DC10 in the late 1960s and early 1970s was intense, with the members of the KSSU (KLM, Swissair, SAS, UTA) and ATLAS (Air France, Lufthansa, Alitalia, Sabena) pressuring. The KSSU members placed orders for 14 -30s, with another 22 on option, at the 1969 Paris Air Show. The DC10 primarily won on the basis of the three variants on offer versus the single L1011 model. The ATLAS group also selected the DC10, but with the emergence of the Airbus product, Air France bought neither the DC10 nor the L1011.

The -30 has the same external dimensions of the -10, but the improved CF6-50A engines enabled the MTOW to be increased substantially to 550,000 lbs., which enabled a payload of 104,000 lbs. to be carried 5,500 miles. The underfloor galley was not a desired feature and the space was returned to cargo use. The first -30 was rolled out in 1972 with the first flight taking place in June. The aircraft entered commercial service with Swissair in December 1972.

The -30ER is an enhancement of the -30, providing even further range. The aircraft is powered by CF6-50C2B engines producing 54,000 lbs. of thrust. Fuel capacity was also increased to allow a range of 5,730 miles. Swissair was the launch customer in July 1980 and these were delivered in 1982. The airline also ordered kits to convert two of its existing -30s to the same status. This was the principal civil variant built during the 1980s, although there was a gap between 1983-1985 when no civil DC10s were built.

There has been considerable fluctuation in values over the past 20 years, with the same example attracting a value of $40+ million dropping to less than $3 million. The late 1980s was a time of capacity shortage, fueled by the then-sustained economic growth, the rapid expansion of international travel, the pursuit of market share by the airlines at the expense of yields, the availability of plentiful and cheap funding, sale and leaseback transactions, and the late service entry of new equipment.

At the time, the DC10-30 offered excellent range and capacity, and while still relatively youthful, enjoyed considerable demand. Pricing (an entirely different concept to that of value) of 10-15 year old DC10-30s had jumped to more than $40 million by 1990 compared to the $30 million experienced in 1987-1988. The inflated prices of 1990 helped to ensure a collapse within three years.

The burden of this change in fortunes was largely felt by the financial institutions rather than the airlines. In the late 1980s and even into the early 1990s, airlines, still owning their DC10s, were able to secure favorable sale and leaseback terms. With prices of $40+ million being paid for their aircraft, albeit in return for high lease rentals for a few years, few airlines could refuse. Some of the participating financial institutions expected that the lease agreements with the airlines would be renewed. But with a rapidly changing market, the airlines soon took advantage of the opportunity of turning the aircraft back to lessors.

While the loss of triple A credits as lessees represented a setback for the lessors and their creditors, many were still heavily reliant on the optimistic residual values provided only a few years earlier. Not only were frontline carriers no longer interested in the type, but the fledgling secondary market could not cope with the significant influx of used equipment. Lease rentals and values inevitably plummeted. Instead of over $40 million being paid for the -30s, asking prices of $10 million-$15 million, with offer prices even lower, became the norm. Achieving anything more than a distressed sale was virtually impossible at this time, making it necessary for aircraft to be placed into storage or leased at rates of less than $220,000 per month, a far cry from the $500,000 per month secured only a few years earlier. McDonnell Douglas, having offered first loss guarantees, found itself particularly exposed to the rapid change in market prices.

In the mid to late 1990s, values and lease rentals improved, with sales becoming possible once again. Values, however, never experienced a return to their pre-recession levels, managing to edge just above $20 million as the operator base shifted away from frontline flag carriers to charter and second-tier carriers.

The principal reason for the collapse in DC10-30 values in the early 1990s was the rapid rise in pricing in the preceding years, a behavior that has not occurred since, making it less likely that a significant fall will be experienced by the current generation of widebodies in the coming years. In the late 1990s, the DC10-30 seemed to be in demand once again, mainly from second-tier carriers seeking ETOPs-free service from the tri-jet configuration. The enthusiasm for the type was short-lived though, largely because of the arrival of the Boeing B777 in numbers along with the Airbus A330 and A340.

Values of DC10-30s are once again at rock bottom. Scrapping has become virtually the only option, although the price of spare parts is barely justifying the expense of parting out. While there is little prospect of any improvement in terms of values, the DC10-30 still manages to offer some operators valuable capacity. ETOPs is not an issue, capital cost is extremely low, maintenance is a known quantity, and range is suited to a wide range of operations. Northwest Airlines [NWACQ] recently acquired two 1988 vintage DC10-30s for $5.7 million each.

DC10-30 Vital Statistics
LAUNCH 02/1968
AVAILABILITY 1 (-30) 4 (?30F)
ENG O/H COST $1.5-3.0m
STANDARD MTOW 555,00 lbs
OPTIONAL MTOW 580,000 lbs
FUEL CAPACITY 37,200 usg
FUEL - OPTIONAL 37,200 usg
RANGE- MAX FUEL 7,400 nm
CARGO 3,655 ft3
PAYLOAD 97,000 lbs
MZFW-STD 368,000 lbs
MLW-STD 411,000 lbs
CABIN WIDTH 225 inches
VALUE Y1972 $1.0m
VALUE Y1988 $6.2m
2007 F/V ? Y1980 $2.9m
2010 F/V ? Y1980 $1.3m
LEASE RATE ? Y1980 $90,000 per month
2007 LEASE RATE ?Y1980 $85,000 per month

Aircraft Asset Assessment: The DC10-30

Market Presence. The surprise is that there are still DC10-30s in service. Gone are such flag carrier names as British Airways, SAS, Sabena, Swissair, Lufthansa, MAS, Thai, and PAL, replaced by Omni Air and Biman. The single remaining U.S. carrier, Northwest, is the exception, with the majority having filtered down to second-tier operators a number of years ago. The operator base of the -30, a prime consideration when assessing current and future values, has declined from 32 to eight between year-end 1990 and 2001. The DC10-30 now possesses the capital cost and market attraction for greater ad hoc charter use, but the cost of a D check is around $3.2 million and a relatively modest engine overhaul is $1.3 million per engine. The landing gear, featuring the center line unit, can also add considerably to the overhaul cost. The maintenance status of the more elderly -30s can therefore represent the total value compared to less than 10-15 percent for a similar capacity but younger widebody twin.

Market Outlook. The prospects for the DC10-30 appear particularly grim, although such a negative outlook has been evident for the last seven years at least. Even the expected 30-year life for the majority of passenger units will be difficult to achieve as current market conditions persuade operators to accelerate retirement. Most operators with the route structures and traffic capable of supporting the DC10-30 have developed a preference for newer types, and existing units are only serving as a stopgap measure.

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