Sunday, September 29, 2013

Market Sentiments at odds with Statistics. Case of Economic service life of aircrafts.

Recently I came across an interesting conflict. A serious debate has been going on whether Economic Service life of Civil Aircrafts are under pressure.

Proponents of debates cite recent developments and experts view to say that Economic service life of aircraft is reducing. And opponents are citing statistics to refute the claims. That makes the debate all more interesting.

Let's quickly look at what proponents are saying:
  • Aircraft values have fallen significantly for many older aircraft over the last two to three years.  John McCormack , Ernst and Young, 2012
  • The widening gap between the physical life of the aircraft and the assumptions made in respect of life and value in financiers' calculations is a growing concern. Airline Business 2012
  • Another trend is for younger aircraft to be parted out and sold for spares as this provides greater value than as an aircraft in operation. PWC 2013
  • … despite the large availability of used aircraft in the secondary market, many airlines have begun to lease new aircraft from lessors ……made older aircraft harder to sell/lease, increasing their availability and reducing their values... Aircraft Monitor 2012
  • ….. aircraft lessors basing their lease rates for new jets on the assumption they will have an economic life of 25 years, when 15 years might be more realistic… Aviation Week MRO Forum, Dallas 2012
There are several explanations offered to support the aforesaid trend. Customers are now preferring new aircrafts to attract customers. Also, on the supply side, it is alleged that there are too much new aircrafts production from OEMs. ECA (Export Credit Agency) support new aircraft manufacturing in home countries. In addition, they give credit support for the sale of new aircrafts to developing countries which were earlier a second hand market. Coupled with technology advancements in new aircrafts which lower cash operating costs for airlines, the overall effect is downward pressure on the residual values of the older aircraft and the second hand market. Also, the changes in regulation related to safety, noise and emissions are driving up the demand of new aircrafts.

However, the opponents point out that statistics tell a different story. 

Both positions are well supported, but then how does one clarify the dichotomy. There is no straight answer, but following observations may help shed some light:
- The world economy has been going through a slump for past 5 years which has put pressure on aviation industry as a whole and consequently on second hand market.
- The statistics from a leading aircraft leasing company do show higher retirement near 15 year life but not significant to shift the average over 45 years.
- Early aircraft retirements are a more recent phenomena. Many LCC carriers have adopted this approach to acquire fuel efficient and brand new aircrafts to attract customers. 

It might be too early to say whether there is a long-term fundamental shift in aircraft economics or a short-term trend. However, the issue can have far reaching consequences on the industry and hence warrants attention and close tab on developments.

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