Aircraft finance: Boeing’s 737 MAX troubles may yet have only modest impact on valuations

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Boeing is still waiting on an exact timetable from aviation regulators for the return to service of its 737 MAX passenger jet, making it hard to judge the impact – if any – that the grounding of the plane will have on aircraft values, says Scope Ratings.

Scope analyst Helene Spro looks at different scenarios for the aircraft-financing sector, arguing that the outcome might be limited even though the broader airline-sector context is a concern.

The FAA has indicated that Boeing could have the 737 MAX back in the air by December, without giving a clear timetable. What is the outlook for aircraft values from this prolonged grounding?

I see four scenarios. The first – and most likely – is little or no impact. Boeing ultimately fixes the problems with the 737 MAX. Aircraft are delivered to airlines. We get back to “business as usual.”

Boeing is surely hoping that will be the case. But might there be less favourable outcomes?

There is the possibility of lasting damage to the 737 MAX’s reputation, with a corresponding impact on aircraft values, were airlines to lose trust in the aircraft model, investors decided not to invest in it and/or airlines reduced its relative value as passengers refuse to fly in it.

One crucial aspect is the findings from the authorities’ investigations into the Lion Air and Ethiopian Airlines crashes involving the 737 MAX. What effect might they have?

A third scenario to watch is whether Boeing models other than the 737 MAX are implicated in the findings from the authorities. After two 737 MAX aircraft crashes, The New York Times reviewed internal emails, corporate documents and federal records related to Boeing’s manufacturing plants, questioning the safety and quality controls at Boeing’s 787 plant in North Charleston. Should further investigation result in quality concerns about other aircraft models, values of all Boeing models might show a decline. Should this happen, some or all Airbus models would likely benefit from a corresponding increase.

If the third scenario materialises, would that be serious for investors?

Less so than it perhaps looks at first sight. True, the expected loss on the facilities with Boeing aircraft as security will increase, while the expected loss on the Airbus facilities will decrease. Other manufacturers such as Embraer and Bombardier might benefit from a small uplift in values as well. But in a well-diversified portfolio, all this would balance out. Only investors invested in just Boeing aircraft might take a hit: if an airline defaults before Boeing aircraft values recover, the expected loss could be higher than estimated at the time of the original transaction.

As a result, Scope has put public and private aviation ratings secured by Boeing aircraft under watch for downgrade. The review for downgrade status follows the uncertainty about which aircraft models will be affected by the recent events and about the materiality of value corrections, if any.

What about the interplay with wider market trends?

Concerns are growing that the market is oversupplied with aircraft. Current order backlogs suggest continuous growth in passenger demand. At the same time, we see signs of airline consolidation. If we see a sharper-than-expected economic slowdown and more consolidation (see Scope’s Europe’s big five take more than half of region’s air travel market as small airlines struggle, 22 Jan. 2019), then aircraft values might fall across the board. The grounding of the 737 MAX is supporting the market for now, as airlines keep older models in the air. However, if the 737 MAX re-enters service just as the industry faces a slump and a high number of other aircraft are delivered, it might exaggerate a downturn in aircraft values.

How do you weigh up the scenarios?

The aviation industry is at a vulnerable part of the cycle as explained in Scope’s Aviation Finance Outlook 2019. However, we think it is likely that Boeing’s troubles are limited to the 737 MAX. Short of unexpectedly damaging findings by the authorities, the plane will return to service and ultimately be valued on its operating performance, with most passengers’ confidence restored by the action of regulators and airlines deciding to fly the plane again.

 

Thanks to Scope Ratings for the authorisation to reproduce this interview

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