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Thank you for your participation and I look forward to responding to your comments.

Gueric Dechavanne
Vice President, Commercial Aviation Services
ISTAT Certified Appraiser

We are also seeing some potential strengthening of lease rates for new aircraft.  New Airbus A320 aircraft seem to now be leasing in the $320K per month and New Boeing 737-800 are experiencing monthly lease rates of about $350-360K per month which is up slightly from our last Turbine Aircraft Guide update.  Most of the remaining in production aircraft continue to be soft with lease rentals being either fairly stable or down by about 5%-10% since the last quarter of 2009.  Aircraft such as 1995 Boeing 767-300ER are now being leased around $275K per month which is about a 5% reduction from late 2009.  Airbus A330-200s are now leasing in the low $400K per month for 10 year old aircraft versus mid-$400K per month in late 2009.  Lease rates for the Boeing 757-200 have remained stable, due to the continued demand from the major operators, with monthly lease rentals being seen in the $160K per month for a 15 year old ETOPS aircraft.  These trends, although somewhat mixed, do show some promise that things are going to get better.  Aircraft values are a bit tough to accurately determine in this market as there are very few transactions, especially for older used aircraft which are viewed as a much higher risk from lenders and investors.

Another topic which has peaked our interest are the recent newcomers into the lessor market such as Jackson Square or Steve Hazy’s new venture amongst others.  It appears that most of these new lessors will have in the range of $1Billion or so to invest in aircraft and all of them seem to be interested in the Airbus A320 family of aircraft and Boeing 737 NGs.  With this increase in interest and competition for sale/leaseback deals in the market today, it does make me wonder if this will put some upward pressure on aircraft values as these lessors start to push their offers upward to win transactions over others.  Don’t get me wrong, I am sure that there are currently plenty of deals to be had from global operators looking to increase their capital through sale and leasebacks but it should remain interesting to see the potential effects of these new lessors looking to grow their newly founded portfolios over the next few years.

And lastly, I couldn’t leave you without mentioning the possible single-aisle aircraft re-engining solution that everyone seems to be talking about.  I do believe that it is still a bit too early to tell what affect this may have on the existing fleet or what a potentially shorter production cycle may have on the newly produced aircraft.  With a potential fleet size of more than 4,000 aircraft from either manufacturer over a 10 year period, it does raise the question as to whether or not these aircraft will have any steeper residual value curves than the current generation of aircraft or will financial institutions succumb to operator demand for sale/lease backs and financing and continue to utilize the current economic guidelines used in today’s transactions.  Only time will tell as always but it should make for an interesting decade.

From our discussions with various industry sources, we keep hearing that there is a lot of activity in the marketplace.  But, with all of this activity, are deals actually being done.  Well, based on our comparison of transactions completed in the first two months of this year versus the first two months of last year, we would have to say no.  Our analysis shows that in the same period of 2009, there were around 350 naked sales, sale & leasebacks, and sales with leases attached as compared to a little over 225 transactions for the same two months of 2010.  These numbers include new and used jet and turboprop aircraft and keep in mind that there may have been some carry over from the previous year.

However, even with a 35% drop in activity from the previous year, we continue to see signs that tell us that things are slowly improving.  A few of those include an increase in traffic, improving passenger and cargo operator results, and some stability in lease rentals.  On the corporate side of aviation, we are also seeing some increases in aircraft values, by as much as 15% since December, for aircraft such as the Gulfstream G550, Bombardier Global Express XRS and Challenger 605, as well as the Dassault Falcon 900EX.  In our opinion, these are typical indications that a recovery is coming.  Based on historical trends and as previously stated, should this trend continue, we expect to see more significant improvements on the commercial side by late 2010 and 2011.

As we continue to see hope that we are finally coming out of this recession, we felt that it would also be interesting to see the potential improvements that may occur with some aircraft over the next few years.  Keep in mind that there is typically a 1 to 2 year lag between lease rental improvements and value improvements.  Below is our analysis of several aircraft and how the last recoveries impact their values and lease rates.

Airbus A320-200

During the mid 1990s, A320 lease rates increased by 10-15% during the first year of recovery from a low of $200K per month.  Throughout the rest of the recovery, this aircraft topped out with an increase of about 50% from the low.  By 1996-1997, A320 values followed suit with a 5% increase from their low of $25M.  During the last recovery, the A320 showed a lease rate improvement of 5-10% in the first year of recovery and reached a 30% increase from the low of $120K during the rest of the recovery.  A320 values in the last upturn showed improvements of roughly 10% between 2006 and 2007 from a low of around $11M for the oldest vintage.

Airbus A330-200

During the last recovery, A330-200 lease rates improved by 30% in the first year of recovery from a low of $410K per month and reached a 40-50% increase during the rest of the recovery.  A330-200 values showed improvements of roughly 5-10% between 2004 and 2005 from a low of about $55M, and remained stable throughout the rest of the recovery.

Boeing 737-800

Boeing 737-800 lease rates increased by 5% in the first year of our last recovery from a low of $225K per month and saw a 25% increase during the rest of the recovery.  Boeing 737-800 values showed improvements of roughly 10% between 2004 and 2005 from a low of about $25M and peaked with about a 20% increase from the low throughout the remainder of the recovery.

Boeing 767-300ER

During the last recovery, the Boeing 767-300ER had a lease rate improvement of 5% in its first year of recovery from a low of $175K per month but reached a whopping 100% increase during the rest of the recovery.  Boeing 767-300ER values in the last recovery showed improvements of roughly 10% between 2005 and 2006 from a low of about $18M and maxed out with a 25% increase from the low during the rest of the recovery.

With 2010 well under way, it seems that our industry may be preparing for some type of recovery.  Airline results are better than expected, traffic around the globe seems to be up, and capacity also seems to be increasing.  CV is also seeing signs of stability in some aircraft lease rates.  Now, does this mean that the market will be going gangbusters over the next few months…probably not, but it hopefully means that the worst is now behind us and we can start planning for a slow recovery that will once again show everyone that this industry is exciting and worth being a part of.  In the spirit of tracking the potential recovery, CV will be providing values and lease rates for various aircraft types over the course of the year that will hopefully allow our readers to see how the market is improving.

AIRCRAFT VALUES AND LEASE RATES (YOM/Current Value/Lease Rate (Per Mth):

Airbus A319-100                (1995 to New)        $13.67M to $34.08M     $145,000 to $270,000

Airbus A320-200                (1988 to New)        $5.96M to $38.34M       $105,000 to $300,000

Airbus A330-200                (1998 to New)        $44.67M to $89.61M     $420,000 to $735,000

Airbus A330-300                (1993 to New)        $29.02M to $94.44M      $325,000 to $770,000

Boeing 737-300                  (1984 to 1999)        $3.04M to $7.69M         $70,000 to $135,000

Boeing 737-400                  (1988 to 1999)        $5.85M to $10.75M       $95,000 to $180,000

Boeing 737-700                  (1997 to New)        $16.17M to $34.26M       $170,000 to $290,000

Boeing 737-800                  (1998 to New)        $22.82M to $42.70M      $220,000 to $345,000

Boeing 747-400                  (1988 to 2005)        $22.44M to 74.35M        $300,000 to $675,000

Boeing 757-200                  (1982 to 2004)        $3.46M to $19.72M        $80,000 to $240,000

Boeing 767-300ER             (1986 to New)        $8.0M to $64.77M          $220,000 to $495,000

Boeing 777-300ER          (2003 to New)        $85.80M to $145.39M    $875,000 to $1,225,000

Bombardier CRJ-200ER   (1993 to 2007)        $5.17M to $10.77M       $65,000 to $100,000

Bombardier CRJ-900ER   (2002 to New)        $15.35M to $25.15M      $170,000 to $250,000

Embraer ERJ-145ER          (1996 to 2002)        $5.45M to $7.49M        $65,000 to $80,000

Embraer E-190LR              (2005 to New)        $21.64M to $27.75M      $195,000 to $245,000

As we reach the end of what has been a challenging year for most of us, I wanted to take this opportunity to look back at some of the aircraft value and lease rate trends which occurred in 2009.

2009 Aircraft Value and Lease Rate Trends:

Our prediction for 2010, we feel that the first half will continue to be challenging for the industry with continued declining trends for most aircraft.  Depending on the strength of the global economy, we may see some aircraft values and lease rates start to stabilize in the second half of 2010 as demand for some types, such as the Airbus A330, Boeing 767, Boeing 777, Bombardier CRJ-900, and Embraer E-190, begins to wind down some of the excess supply in the market place.  We also see more stability and possible improvements in the cargo market as there seems to already be signs that this portion of the industry is starting to recover.  Overall, the year will still be viewed as a difficult year with the hope that that shining light at the end of the tunnel will start to become brighter.

Until then and on behalf of the Collateral Verifications team, we would like to wish everyone a safe and happy holiday season with best wishes for a healthy and prosperous new year.

http://iagblog.podOmatic.com/entry/2009-11-19T10_40_14-08_00

Even with all of this doom and gloom, the industry still remains as exciting as ever as we look at all of the new up and coming products such as the Boeing 787, Airbus A350, Bombardier C Series, Mitsubishi MRJ, etc…  Focusing on the C Series specifically and what it may bring to the industry, it does raise some interesting points.  Should Bombardier be successful in producing an aircraft that meets all of the currently marketed expectations, how will this affect the current in-production aircraft such as the Airbus A318/A319 and Boeing 737-600/700?  Will the entry into service of the C Series further affect the likes of the Boeing 737-300/500 which have already suffered great reductions in value and lease rentals?  Will the CS100 impact values of the Embraer E-195 and if so, how will Embraer respond?

If we look back to the mid 1990s, the Boeing 737-200, which had already taken a hit in value in the early 1990s due to the downturn, took another hit in value to the tune of 30-40% even though the industry was on its way to recovery.  We believe that this was due to the entry into service of the Airbus A319 which offered the next generation of technology to the industry for that size aircraft.  Will we see the same phenomenon with the Boeing 737-300/500 as the C Series enters service?  I believe that as long as Bombardier can produce the aircraft in the numbers that may be required by the market, this is very probable.  Currently, Bombardier claims that they will be able to produce 1 aircraft per day, 3 years after entry into service.  As for the Boeing 737-700 and Airbus A319, the initial affects will most likely be much less noticeable as the C Series enters service but as the industry goes into its next potential downturn (2015/2016??) and the C Series grows its global market share, these affects may become much more apparent.  Will this force Airbus and/or Boeing to play the price card to account for the 15% cost reduction the C Series promises thereby affecting residual values of their products?

Of course, that also does not take into account any potential changes to the Airbus and Boeing single aisle aircraft, such as a possible re-engining of these aircraft or the launch of the next generation single aisle aircraft.  But, as these potential events are only in their initial discussion phase, I will leave them for another CV Monthly Market Update.

Below you will find our analysis of what we believe to be the value of the current unencumbered aircraft in some of the major US carriers.  As you will see, aside from a few carriers, today’s major airline does not have very much, in terms of aircraft, to be used as collateral for any type of financial structures.  Is this trend something that will continue going forward, pushing airlines to look to major lessors for aircraft as capacity is once again needed?  Will the already troubled leasing companies be able to support such demand or will a new business model, for airlines and/or aircraft lessors, be needed for this new environment? These are questions that only time will be able to answer as the industry begins to recover and the capital markets return to this sector in full force to support this industry once more.

Unencumbered Fleet Value

American Airlines                                    US$790 Million

Continental Airlines                               US$160 Million

Delta/Northwest Air Lines                 US$830 Million

Jetblue Airways                                         US$190 Million

Southwest Airlines                                  US$4.3 Billion

US Airways                                                     US$170 Million

Unites Airlines                                            US$180 Million