The Wall Street Journal
By Jon Sindreu
October 20, 2023 5:30 am ET
Anyone who has walked into a used-car dealership knows about the risks of being sold a lemon. When it comes to aircraft, however, it is the newer models that seem more likely to leave owners stranded.
The value of 10-year-old planes has jumped in recent weeks, according to appraisal data from aviation-analytics firm Ishka. The price tag for the Airbus A320-200—the backbone of the world’s short-haul fleet—has risen 10% since August, and has now almost fully recovered from the Covid-19 crisis. Rates to rent the jet were up 6%.
The popularity of trusty clunkers is rising because of issues affecting the newer version of the plane, the A320neo, introduced in 2016. In July, U.S. engine maker Pratt & Whitney, a division of RTX (formerly Raytheon), warned that contaminants had been found in powdered metal used in some of its Geared Turbofan, or GTF, engines, which power roughly 40% of the A320neo fleet. Last month, the company said the issue could affect about 700 engines and require 300 days to repair each one. Hundreds of planes are set to be grounded through 2026.
Other popular older models have also rebounded in value, though wide-body jets such as the Airbus A330-300 and the Boeing 777-300ER are still only worth about half what they were at the start of 2020.
Idiosyncratically, the A320’s direct narrow-body rival, the Boeing 737, has fallen 4% in value since August. The grounding of its updated version, the 737 MAX, pushed up second-hand values before the pandemic, and MAX production issues have emerged this year too.
The valuation gains for most aircraft suggest that lessors and investors are starting to bet that previous generations of planes are more insulated from the endless manufacturing problems afflicting newer ones.
Of course, a burst of demand for second-hand jets is to be expected at a time of restricted supply. Carriers such as Spirit Airlines, Wizz Air, IndiGo and Air China are affected by the A320 engine problem. They may cut the number of flights they operate, especially since travel demand is weakening, but they will also likely need replacement planes. Jet orders remain high and manufacturing issues add to delivery times.
About 8% of aircraft owned by lessors remain unplaced with airlines, compared with about 6.5% before the pandemic, figures by aviation-analytics company IBA show, but this number is now falling quickly.
Crucially, the current string of mishaps involving newer planes isn’t a one-off. Ever since Boeing botched the development of the 787 Dreamliner in the 2000s, aerospace firms have been battling to rectify defects. The rival engine to the GFT, the LEAP, is also suffering from durability issues that its makers GE Aerospace and Safran are working to address. The LEAP is used in both the A320neo and the MAX.
As Boeing’s crisis showed, manufacturers came to focus too narrowly on short-term profit. Yet there is a technological cause as well: The low-hanging fruit in aircraft development has been picked. Extracting a 15% gain in fuel efficiency from each new generation requires ever more complex advances in materials and design. State-of-the-art turbofans have more parts that can break, and operate at higher temperatures, increasing the stress.
As engineering keeps getting harder, future models may become even less reliable upon introduction. When making strategic decisions about how many first-hand planes to buy, airlines should start taking into account that technical issues can sometimes offset fuel-efficiency gains: Defective engines dealt a big blow to Norwegian Air Shuttle’s now-defunct long-haul operations, for example. The implication is that midlife jets may have permanently higher “residual values” at the end of their leases.
This is a reason to be bullish about the shares and bonds of large leasing companies such as AerCap and Air Lease Corporation, which have severely underperformed the S&P 500 since the pandemic. Still, these firms have young fleets.
By contrast, aircraft asset-backed securities, or ABS, have an average jet age of 13 years, according to S&P Global Ratings. This market has been mostly frozen after a series of setbacks. Airlines delayed payments during the pandemic and many aircraft got stuck in Russia following the war in Ukraine. Then came this year’s credit downgrades and rise in interest rates. Now the stage may be set for a thaw.
They just don’t build planes like they used to.
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