ISTAT takeaways

The NEO question

The 17th european ISTAT conference is over – more than 550 people joined the event. For me it was my first ISTAT conference and a very special experience, as I am en engineer and at this conference I learned to see the aviation industry from a bankers, lessors and an appraisers perspective. And this perspective is very different – money (sometimes sadly) rules the world, as we all know.
And when I as an engineer and environmentally conscious guy of course would like to see a new engine on the current narrowbody families, the folks who live from buying, selling and financing aircraft are not really enthusiastic about it.
They fear that their current assets loose their value once the –NEO versions (or how ever they would be called) come to market.
But is that really the case, I wonder? There are 4,349 A320 family aircraft in operation as of September 30, according to the Airbus O&D spreadsheet, 3,411 B737NG were delivered by September 2010 (and just a few of them are out of service). There will be approximately 4,000 more A320/B737’s delivered by late 2015, when a reengined model could enter service.
These reengined aircraft will not hit the second-hand market for, say, another 10 years, at least not in greater numbers. So why on earth should there be a big hit on residual values for the not-NEO narrowbody aircraft? I don’t get it – but a I am just an engineer…;-)

One of the biggest opponent at the conference was the self-described “godfather of aircraft leasing” S. Udvar-Hazy, who described his role in the aviation industry as to ensure that the aircraft manufacturers don’t become like car manufacturers and bring a new model to market every four years or so. He also played down the benefits of the reengining: 15% fuel burn improvement would relate to 5% DOC improvements, given that fuel costs relate to about one third of direct operating costs. In my mind fuel costs will account for more than one third in the foreseeable future with oil prices just again climbing north of $80/barrel and the IEA raising the oil demand forecast.
But SUH further downplays the benefits when referring to John Leahy, who would like to raise list prices for the NEO’s by $7-8m, what it half of the benefit over 20 years operating a NEO aircraft. So, SUH says, the benefit is just 2-3%, which could be further eroded by higher costs for training maintenance personnel and lost commonality.

The environmental benefit he calls as PR benefit for the outside world. Tell that your neighbors living next to an airport: I am sure that an aircraft that is roughly 5dB (per measuring point) less noisy is more than just PR for them – it would be a benefit in quality of life! And as I explained earlier it can also be worth a few percentage points in COC, at least in Europe.

But then I find another inconsistency in SUH’s argumentation: if the new engine would be worth only 2% in DOC, why should the older aircraft loose their value. I can understand that they would loose value, if the newer aircraft is way better, but not when the difference is so small.

Lufthansa’s fleet chief Nico Buchholz on Monday called the improvements for the –NEO sufficient. On Tuesday he kind of backed away a little bit, saying that he would like to see a new aircraft, but would consider taking the second best option if the best one is not available.

SUH was asked what he thinks about the CSeries, as at the Farnborough Airshow he ordered almost every aircraft but the CSeries. His message was clear (at least to me): the money he got from investors has to work, i.e. to make money. So he cannot place an order for an aircraft he gets four or five years later and only then can earn money through leasing rates. So we can expect an order for the CSeries once the aircraft is in production and available delivery slots are not too far away.