Boeing Buoyed by $20 Billion of Idled Max Jets Valued Like New
When Boeing Co. ended a long commercial drought last month by handing over 737 Max jets to two top customers.
(Bloomberg) -- When Boeing Co. ended a long commercial drought last month by handing over 737 Max jets to two top customers, the transactions marked a little-noticed break with tradition.
The planes were built in 2019 but recorded as 2020 models when they were delivered, having sat dormant during the longest jetliner grounding in U.S. history. The seemingly innocuous distinction could provide some financial relief for the beleaguered aerospace giant, which lobbied appraisers to accept the new approach.
Hundreds of Max jets valued at about $20 billion are poised for similar age-defying treatment as they emerge from storage lots to join the fleets of such carriers as American Airlines Group Inc. and United Airlines Holdings Inc. Their vintage will be based on when they’re delivered, even if that doesn’t happen for another year or two while air travel inches back from the coronavirus pandemic.
Such arcane details are crucial to Boeing’s campaign to restore a little luster to its best-selling plane, which was banned in March 2019 after two deadly crashes. A newer model year adds millions of dollars to appraisals, a critical boost for a jet fighting to regain its footing in a depressed aircraft market. The company’s Max 8 planes have slipped below Airbus SE’s slightly smaller A320neo in value -- a humbling setback for Boeing after decades in which the 737 commanded a premium.
“With the grounding being longer than expected and then followed by the Covid pandemic, values and lease rates have taken a hit,” said Douglas Kelly, senior vice president for asset valuation with Avitas Inc. “The A320neo has declined also, but not as much as the Max.”
In the rare cases in the past that an aircraft delivery has taken more than a year, appraisers typically dated the plane to its initial flight after rolling out of the factory. With the Max, Boeing argued for basing the model year on when a customer takes control -- as is the practice for factory-fresh aircraft -- since the planes are still technically part of the company’s production system.
Appraisers also plan to reset the vintage of other undelivered jets stranded for more than a year by the pandemic. About 630 never-flown planes are in storage, Barclays Plc estimates, including A320neo aircraft and twin-aisle models such as the Boeing 787 Dreamliner and Airbus A350. But not everyone is enthusiastic about the practice.
“It’s a very big can of worms,” said Olga Razzhivina, an appraiser with Oriel. She plans to determine model years plane by plane, worried about the effects of extended storage. “These aircraft are potentially missing years of their life.”
Boeing said it was continuing to “work with global regulators and customers to safely return the 737-8 and 737-9 fleet to service worldwide.”
The Max crashes killed 346 people and prompted a grounding that lasted 20 months in the U.S. and even longer elsewhere. They also badly damaged Boeing’s engineering reputation and undermined the value of the company’s most important jet model.
That leaves buyers and lenders facing an outsize risk if there’s another Max accident. The market’s jitters were underscored by the brief sell-off in Boeing shares after a 26-year-old 737 crashed off the coast of Indonesia on Jan. 9 with 62 people on board. While the causes of that disaster are under investigation, the model was two generations earlier than the Max version under so much scrutiny.
Already, the Max’s estimated value trails the A320neo’s by $2.1 million, according to Avitas. Another appraiser, Ascend by Cirium, pegs the gap at $5 million and puts the Max 8 at $43.5 million, or 11% less than than before the grounding in early 2019. Such appraisals take into account recent sales and are typically a more reliable indicator than manufacturers’ list prices, which are more than twice as high.
The model year assigned to newly delivered jets is just one piece of the puzzle. The main drag on all prices in 2020 was the pandemic, which caused an unprecedented drop in air travel. A rebound this year would help lift the market, especially for single-aisle jets such as the 737, said Bloomberg Intelligence analyst George Ferguson.
White Tails
Whether the Max can narrow the gap with the A320neo will also depend on Boeing’s management of about 450 planes built during the grounding, and how deeply the company has to discount a number of “white tails” -- jets that lack buyers. At the same time, the Max should get an extra boost from its recent return to commercial service in the U.S., Mexico and Brazil, and an impending comeback in Europe, Asia and the Middle East.
As the market normalizes, however, the vintage year of Max planes will play a key role in influencing values.
Boeing is well versed in maintaining idle airplanes, albeit on a smaller scale than with the Max. The Chicago-based company is also resetting the clocks for aircraft warranties and maintenance checks to start at delivery instead of their initial factory flight.
George Dimitroff, head of valuations at Ascend by Cirium, said he’s comfortable basing aircraft ages on the delivery year -- provided Boeing focuses on clearing out its inventory of parked jets so that they aren’t idled for too long.
“If we see some aircraft that were built in 2019 delivered beyond March 2023, and there’s a four-year delay, we may have to rethink that,” he said. “Our opinion will be based on how buyers perceive them.”
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