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One Engine, Two Engines, 3 Engines: Fishing for the Impact on Values Adam Pilarski, AVITAS, Inc.
IATA Maintenance Cost Conference, Sept 11th, 2014
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ENGINE CHOICE & VALUE RETENTION
Engine Choice & Value Retention
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Contents
Theory
Art of forecasting residual values
Analysis and results
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ENGINE CHOICE & VALUE RETENTION
Theory
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Depends on interested party
Engine manufacturers – One is enough
Aircraft manufacturers – More is better, Bigger market
Airlines – More is better
Leasing companies – Mixed, desire for vanilla but bigger market
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Al Baker stressed that he “wants choice. We have said that to
Boeing and Airbus. We want a choice so airlines are not with their
back against the wall” from a commercial perspective.
Aviation Daily July 17th, 2014
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Robert Martin, CEO of BOC Aviation stressed that he is happy with
having only one supplier on the A330 Neo (Rolls Royce).
“As a lessor I much prefer one engine type. You don’t have a split
market.”
Aviation Daily July 16th, 2014
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Steven Udvar Hazy wants engine choice.
“The market is big enough for two engine options” he said, adding
that he was disappointed that GE wasn’t ‘involved’
Hazy says ALC sees a demand for up to 1,200 A330 Neos
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CIT’s Jeff Knittel also argued for one engine
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“If Airbus goes ahead with it, we’d prefer that they stick with just one
engine type,” says McClelland.
“From a lessor’s point of view, it’s not clear that the supposed
benefit of lower acquisition cost from a second engine choice
outweighs the ease of future placement that comes from having just
one engine. Furthermore, it’s not clear that the market for an A330
Neo would be large enough to sustain two or three engine
programmes.”
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Chief Operating Officer – Customers John Leahy downplayed the
significance of only having one engine supplier on the A330 Neo –
Rolls Royce and its Trent 7000. He says the only reasons airlines
want two suppliers is so that they can get a better deal on the
engine.
“But we have taken the liberty to negotiate a good engine price with
Rolls Royce for all customers in advance” Leahy said.
Aviation Daily July 21st, 2014
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“We tried hard to have an engine choice” (on the A330 Neo), Tom
Williams, EVP Programmes, Airbus said.
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ENGINE CHOICE & VALUE RETENTION
Art of forecasting residual values
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Why should we care?
Pay correct price for the airplane
Obtain financing, liquidity
Reduce cost of financing, reduce risk
Get opportunity for upside gains
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ENGINE CHOICE & VALUE RETENTION
Analysis and Results
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R² = 0.0262
0
20
40
60
80
100
120
140
1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Nominal Price ($ mil)
Aircraft Transactions in Current Price
Source: AVITAS's transaction database.
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R² = 0.0075
0
50
100
150
200
250
1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Aircraft Transactions in Constant Price
Source: AVITAS's transaction database.
Price in 2013 U.S. Dollar
($ mil)
Inflation matters
So does original price
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R² = 0.8251
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
0 3 6 9 12 15 18 21 24 27 30
Aircraft Residual Value
Source: AVITAS's transaction database.
Percent of Value
Retained
Regression on aircraft age
variables
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0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
0 3 6 9 12 15 18 21 24 27 30
Aircraft Residual Value
Source: AVITAS's transaction database.
Percent of Value
Retained
Regression on aircraft age, aicraft
characteristic, and market related variables
R² = 0.8648
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-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
0 3 6 9 12 15 18 21 24 27 30
Comparing Estimation Residuals of Aircraft Residual Value Analysis
Residual, Regression on aircraft age
Residual, Regression on aircraft age, aircraftcharacteristic, and market related variables
Source: AVITAS's transaction database.
Percent of Value
Retained
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Airplanes included
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Study of the Effect of Engine Options on Aircraft Retained
Values
Airplane Types Included in the Study
727-100, 727-200, 737-100, 737-200, 737-300, 737-400, 737-500, 737-600, 737-700, 737-800,
747-100, 747-200, 747-300, 747-400, 757-200, 757-200EM, 767-200, 767-200ER, 767-300,
767-300ER, 777-200, 777-200ER, 777-300, A300B2-200, A300B4-100, A300B4-200, A300B4-
600R, A310-200, A310-300, A319-100, A320-100, A320-200, A321-100, A321-200, A330-200,
A330-300, A340-300, AVRO RJ-100, AVRO RJ-70, AVRO RJ-85, BAC 1-11-200, BAC 1-11-400,
BAE 146-100, BAE 146-200, BAE 146-300, DC-10-10, DC-10-15, DC-10-30, DC-10-40, DC-9-
10, DC-9-20, DC-9-30, DC-9-40, DC-9-50, F100, F-28 Mk4000, L-1011-1, L-1011-100, L-1011-
200, L-1011-50, L-1011-500, MD-11, MD-81, MD-82, MD-83, MD-88
Population considered
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Total
delivered
One
Engine
Two
Engine
Three
Engine
Narrowbody 22,119 14,190 7,939 N/A
Widebody 7,579 2,251 1,951 3,377
Observations
Narrowbody – 2,368
Widebody – 653
Timeframe – 1970-2013
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Study of the Effect of Engine Options on Aircraft Retained
Values
STATISTICAL MODEL
Function % Retained Value = f(economic, market, and aircraft related
variables, engine option dummy)
Narrowbody
Results
R-squared 0.86 - 0.88
Coefficient of engine option
dummy 0.02 - 0.05
Sales Price (in 2013 USD) $0.1 - $85 mill, Average $22.1 mill
Widebody
Results
R-squared 0.76 - 0.77
Coefficient of engine option
dummy 0.05 - 0.06
Sales Price (in 2013 USD) $0.1 - $ 235 mill, Average $53.2 mill
Summary
Preliminary indications are that engine options enhance average
aircraft resale values
Impact circa $400,000 to $1M for narrow bodies and $2.5M to $3M for
wide bodies
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Cycles Explained in Musical Terms
Things are wonderful
Airlines finally profitable
Low interest rates Money looks for investment opportunities
Fuel prices stable
Hence
Huge orders
Huge deliveries
Huge backlog
Hence
Talk of serious production ramp-up by both Airbus and Boeing
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AVITAS, Inc. - World Headquarters 14520 Avion Parkway Suite 300 Chantilly, VA 20151
USA
Phone: +1 703 476 2300 Fax: +1 703 860 5855
AVITAS Europe
PO Box 38 Betchworth
Surrey RH3 7YZ UK
Phone/Fax: +44 1737 843 756
www.AVITAS.com
