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Shortening Of Airliner Life Cycle : A380 Example  
User currently offlinefaro From Egypt, joined Aug 2007, 1556 posts, RR: 0
Posted (1 year 9 months 1 week 3 days 9 hours ago) and read 20432 times:

In a neighbouring thread A380 - Airbus Close To 'Significant Order' Part #2 (by iowaman Jan 17 2013 in Civil Aviation) , mention is made of SQ/EK being behind a (speculative) new and significant order for A380's. The reasoning is that these carriers' earliest A380 deliveries would be hitting their lease return dates by the end of the decade and would need replacing.

My question is are we witnessing an effective shortening of airliner life cycle here or is this phenomenon specific to major carriers like SQ and EK only? Can we expect the present A380's in SQ/EK's fleet to easily find a new home after being returned to their lessor or will they experience significant devaluation due to such hypothesised life cycle shortening?

I have the impression that this phenomenon is gaining ground and that the 20-year useful life may become a thing of the past with major carriers.


Faro


The chalice not my son
54 replies: All unread, showing first 25:
 
User currently offlinegemuser From Australia, joined Nov 2003, 5714 posts, RR: 6
Reply 1, posted (1 year 9 months 1 week 3 days 8 hours ago) and read 20305 times:

Quoting faro (Thread starter):
this phenomenon specific to major carriers like SQ and EK only?

It is specific to the general business and especially the tax (including deprecation) environment in their home base.

Gemuser



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User currently offlinePanHAM From Germany, joined May 2005, 9536 posts, RR: 31
Reply 2, posted (1 year 9 months 1 week 3 days 8 hours ago) and read 20310 times:

EK is leasing several of its aircraft, not only the 380s. with money from German private investors who can use their investment as tax shelters. Similar to investment in ships. I haven't seen the details and the fine print of such participation in ownership companies. EK will certainly have the option to extend the lease, or simply return the aircraft to the lessors.

With a 777, the options to find a new lease is by far greater than with a A380. If a relativley new A380 has to be scrapped concerns the carrier rather less. The investors may go broke over it, specially if they have part of their investment financed through loans.

.

.



E's passed on! That parrot is no more! He has ceased to be! E's expired and gone to meet 'is maker!
User currently offlineRara From Germany, joined Jan 2007, 2114 posts, RR: 2
Reply 3, posted (1 year 9 months 1 week 3 days 8 hours ago) and read 20260 times:

Good question.

Does it really make sense to retire such young planes from the fleet? Yes they're leased, but I can't imagine that maintenance costs would go up so radically as to make it necessary to replace the plane.

Anyway the risk lies with the lessors. I'm pretty sure they don't amortise the plane in ten or twelve years. They must speculate on a lucrative second-hand market..



Samson was a biblical tough guy, but his dad Samsonite was even more of a hard case.
User currently offlinena From Germany, joined Dec 1999, 10765 posts, RR: 9
Reply 4, posted (1 year 9 months 1 week 3 days 8 hours ago) and read 20270 times:

Quoting faro (Thread starter):
My question is are we witnessing an effective shortening of airliner life cycle here or is this phenomenon specific to major carriers like SQ and EK only? Can we expect the present A380's in SQ/EK's fleet to easily find a new home after being returned to their lessor or will they experience significant devaluation due to such hypothesised life cycle shortening?

I have the impression that this phenomenon is gaining ground and that the 20-year useful life may become a thing of the past with major carriers.

In particular SQ offloads their planes at a typical age of 12-15 years. As they have an excellent reputation almost all their planes find new homes afterwards (the recent 777 scrapping being a first as much as I know). Note that not a single ex-SQ 744 has been scrapped yet, and all are still active, despite the oldest being close to 24 years old now.
EK holds on to their planes a bit longer, but starting in 2016/17 they will be swamping the market with dozens of 77Ws, and SQ will soon join them. It indeed is a question wether all those planes might find new homes, there are just too many, and too many relatively young ones at a time when a new, slicker competitor comes to the market. The market still can accept 60+ new 777s in a year, but I doubt the used-plane market could absorb more than half per year by the end of this decade. As for the A330/340/777 market I indeed see the danger of a shortened lifecycle of an increasing number of planes.
As for the A380, their number is much lower, and a few frames coming off-lease now and then should be absorbed. We are talking about maybe two dozen planes between 2020-25. Also who knows if the leases wont be prolonged?


User currently offlinefaro From Egypt, joined Aug 2007, 1556 posts, RR: 0
Reply 5, posted (1 year 9 months 1 week 3 days 8 hours ago) and read 20236 times:

Quoting gemuser (Reply 1):
Quoting faro (Thread starter):
this phenomenon specific to major carriers like SQ and EK only?

It is specific to the general business and especially the tax (including deprecation) environment in their home base.

I may be wrong but I thought the UAE did not have a nominal, Western-style tax regime but a very watered-down one.


Faro



The chalice not my son
User currently offlinefaro From Egypt, joined Aug 2007, 1556 posts, RR: 0
Reply 6, posted (1 year 9 months 1 week 3 days 8 hours ago) and read 20189 times:

Quoting PanHAM (Reply 2):
With a 777, the options to find a new lease is by far greater than with a A380. If a relativley new A380 has to be scrapped concerns the carrier rather less. The investors may go broke over it, specially if they have part of their investment financed through loans.

With what we have seen with 777A scrappings of some 3-4 years ago, it is indeed not impossible that we may see A380's getting scrapped by the end of the decade, horrendous a thought as that is...


Faro



The chalice not my son
User currently offlinena From Germany, joined Dec 1999, 10765 posts, RR: 9
Reply 7, posted (1 year 9 months 1 week 3 days 8 hours ago) and read 20063 times:

Quoting PanHAM (Reply 2):
With a 777, the options to find a new lease is by far greater than with a A380.

Sure. But a major point is, that its the sheer numbers we are talking about that are the point here. There a huuuge numbers of 777s swamping the market beyond 2015, but only few A380s a year starting around 2020. While half a dozen A380s should be able to be placed on the secondhand market in a year I am much more doubtful about more than 50 777s (which, by 2020, will be the norm of retired and off-lease Triple Sevens).


User currently onlineRonaldo747 From United States of America, joined Feb 2009, 389 posts, RR: 0
Reply 8, posted (1 year 9 months 1 week 3 days 8 hours ago) and read 20057 times:

Quoting faro (Reply 6):
it is indeed not impossible that we may see A380's getting scrapped by the end of the decade, horrendous a thought as that is...

  

Do not forget that SQ and EK are the operators with the most early A380s on their tarmac which are heavier than later built. With the new A380s with extended MTOWs on the horizon, the early birds might be faster off as usual.


User currently offlinePanHAM From Germany, joined May 2005, 9536 posts, RR: 31
Reply 9, posted (1 year 9 months 1 week 3 days 8 hours ago) and read 20026 times:

I doubt that EK pays corporate taxes in the UAE., the owners are satisfied with the profit and decide whether to take that profit out of the company or use that for future investments.

As to the depreciation, if leased, the leasing rates are costs. There is no depreciation since the aircraft are no owned.

The leasing companies depreciate their investment. When aircarft are financed through the German "KG" model, there is a separate KG for each individual aircraft.



E's passed on! That parrot is no more! He has ceased to be! E's expired and gone to meet 'is maker!
User currently offlinefaro From Egypt, joined Aug 2007, 1556 posts, RR: 0
Reply 10, posted (1 year 9 months 1 week 3 days 8 hours ago) and read 19910 times:

Quoting PanHAM (Reply 9):
As to the depreciation, if leased, the leasing rates are costs. There is no depreciation since the aircraft are no owned.

For information, in 2011 Emirates incurred AED 4.3 billion of operating lease costs (aircraft not on balance sheet) but also had AED 3.6 billion of depreciation charge on assets held on financial leases (on-balance sheet, including aircraft owned outright).

http://content.emirates.com/english/...ages/EK-AR-10-11_tcm233-750566.pdf

At 31.12.2011, they had a total of AED 19.5 billion of aircraft held on financial leases (ie, depreciated) being the bulk of the total aircraft held of AED 21.0 billion. Total aircraft operating lease liabilities however amounted to AED 28.8 billion being superior by 37% to all aircraft held on-balance sheet.


Faro

[Edited 2013-01-18 03:04:09]


The chalice not my son
User currently offlineLTBEWR From United States of America, joined Jan 2004, 13140 posts, RR: 15
Reply 11, posted (1 year 9 months 1 week 3 days 7 hours ago) and read 19593 times:

Other factors that could affect the primary and secondary life cycles of these large aircraft will be fuel prices, major mx costs, new generation, the success of mid-sized, more efficient aircraft that offer a better experience for passengers like the 787 and A350, tax laws in various countries and overall economic conditions.

One also has to wonder if newer generation aircraft are really being designed for a service life beyond 15-25 years due to changing technology, a need for higher replacement rates, the demand for more fuel efficient a/c, if for the other reasons I cited, and economic need by the big a/c makers to want more turnover to be able to sell more units for their own economic needs.


User currently offlinegemuser From Australia, joined Nov 2003, 5714 posts, RR: 6
Reply 12, posted (1 year 9 months 1 week 3 days 7 hours ago) and read 19593 times:

Quoting faro (Reply 5):
I may be wrong but I thought the UAE did not have a nominal, Western-style tax regime but a very watered-down one.
Quoting PanHAM (Reply 9):
I doubt that EK pays corporate taxes in the UAE.

The point is both countries have a more favorable tax environment than most other countries, which makes turning over aircraft, as opposed to more expensive maintenance as the aircraft get older, the better business decision.

Gemuser



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User currently offlinePanHAM From Germany, joined May 2005, 9536 posts, RR: 31
Reply 13, posted (1 year 9 months 1 week 3 days 7 hours ago) and read 19445 times:

Quoting faro (Reply 10):
For information, in 2011 Emirates incurred AED 4.3 billion of operating lease costs (aircraft not on balance sheet) but also had AED 3.6 billion of depreciation charge on assets held on financial leases (on-balance sheet, including aircraft owned o

Yes, but the leasing model I mentioned is an operating lease. I know trhat EK has a mix of financing their aircraft, they may even buy some out of cash flow. However that kind of expansion would be difficult to finance form cash flow, especially when many of the aircraft operated are on operation leases and do not produce cash flow from depreciation.



Quoting gemuser (Reply 12):
The point is both countries have a more favorable tax environment th

well, in case of the UAE, the owners are everything in unison, there is no cpomparison to a normal "western " country



E's passed on! That parrot is no more! He has ceased to be! E's expired and gone to meet 'is maker!
User currently offlineart From United Kingdom, joined Feb 2005, 3382 posts, RR: 1
Reply 14, posted (1 year 9 months 1 week 3 days 7 hours ago) and read 19427 times:

Quoting faro (Thread starter):
Can we expect the present A380's in SQ/EK's fleet to easily find a new home after being returned to their lessor or will they experience significant devaluation due to such hypothesised life cycle shortening?

If owners have depreciated their A380's to $0 after 10 years. surely they can find lessees/customers for a few 10-12 year old, well maintained A380's at the end of this decade? I think of holiday operators expanding capacity for long haul tourism ex-Russia, China, India over the course of the decade. If the demand from them is there, employing 10-12 year old A380's at a commensurate price would be ideal, wouldn't it? I can't think how you would move 500 tourists to far flung destinations at a lower cost.


User currently offlineCRJ900 From Norway, joined Jun 2004, 2206 posts, RR: 1
Reply 15, posted (1 year 9 months 1 week 3 days 7 hours ago) and read 19425 times:
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Could it also be that the first 20-25 aircraft off the production line didn't meet performance guarantees (weight, SFC etc) and thus they will always be more inefficient than their later siblings - hence, SQ and EK has the option to return them when the lease expires and replace them with new aircraft that have all the improvements?


Come, fly the prevailing winds with me
User currently offlinena From Germany, joined Dec 1999, 10765 posts, RR: 9
Reply 16, posted (1 year 9 months 1 week 3 days 6 hours ago) and read 19304 times:

Quoting Ronaldo747 (Reply 8):
Do not forget that SQ and EK are the operators with the most early A380s on their tarmac which are heavier than later built.

Thats true and will surely influence the lease rates when they are being offered secondhand after 2020.

Quoting CRJ900 (Reply 15):
hence, SQ and EK has the option to return them when the lease expires and replace them with new aircraft that have all the improvements?

Option. They dont need an option. When the lease term expires they can just hand them back even without taking new ones. As far as I now the very last EK A380 on order are already meant to replace early-builts, just like the past-2016 built 77Ws are meant to replace early-builts of the same type.


User currently offlineKarelXWB From Netherlands, joined Jul 2012, 12135 posts, RR: 34
Reply 17, posted (1 year 9 months 1 week 3 days 6 hours ago) and read 19250 times:

Maintaining a young fleet is a certain strategy to keep the maintenance costs low (imagine you have to pay the 3th or 4th D-check!), plus the newer models are performing better. Tim Clark said the newest models are up to 4 tons lighter then the oldest units. The 2013 'improved models' will do even better. If you can get a better aircraft for the same leasing costs, why not?

It will be interesting to see what will happen with those second-hand A380s by the end of the decade.

[Edited 2013-01-18 04:31:06]


Only two things are infinite, the universe and human stupidity. And I'm not sure about the universe.
User currently offlinecmf From , joined Dec 1969, posts, RR:
Reply 18, posted (1 year 9 months 1 week 3 days 6 hours ago) and read 19076 times:

Quoting gemuser (Reply 12):
The point is both countries have a more favorable tax environment than most other countries, which makes turning over aircraft, as opposed to more expensive maintenance as the aircraft get older, the better business decision.

What rules are those?

Quoting art (Reply 14):
If owners have depreciated their A380's to $0 after 10 years. surely they can find lessees/customers for a few 10-12 year old,

How does the depreciated value have any influence on if the can find lessees/customers?


User currently offlineEPA001 From Netherlands, joined Sep 2006, 4808 posts, RR: 40
Reply 19, posted (1 year 9 months 1 week 3 days 5 hours ago) and read 18957 times:
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Quoting CRJ900 (Reply 15):
Could it also be that the first 20-25 aircraft off the production line didn't meet performance guarantees (weight, SFC etc) and thus they will always be more inefficient than their later siblings - hence, SQ and EK has the option to return them when the lease expires and replace them with new aircraft that have all the improvements?

Although somewhat heavier then anticipated, even the first A380 exceeded the performance guarantees Airbus made. So there will be no problem in that department, but of course newer A380's are getting better and better on almost a daily basis.  


User currently offlineastuteman From United Kingdom, joined Jan 2005, 10115 posts, RR: 97
Reply 20, posted (1 year 9 months 1 week 3 days 5 hours ago) and read 18666 times:
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Quoting faro (Reply 6):
it is indeed not impossible that we may see A380's getting scrapped by the end of the decade, horrendous a thought as that is...

Nothings impossible, of course. But I wouldn't hold your breath  

Rgds


User currently offlineart From United Kingdom, joined Feb 2005, 3382 posts, RR: 1
Reply 21, posted (1 year 9 months 1 week 3 days 4 hours ago) and read 18558 times:

Quoting cmf (Reply 18):
Quoting art (Reply 14):
If owners have depreciated their A380's to $0 after 10 years. surely they can find lessees/customers for a few 10-12 year old,

How does the depreciated value have any influence on if the can find lessees/customers?

Thank you for your question. I may have got this wrong, but aren't companies in a better position to lower prices to customers for use of an asset with no asset value in the company's books?


User currently offlinesxf24 From United States of America, joined Aug 2007, 1262 posts, RR: 0
Reply 22, posted (1 year 9 months 1 week 3 days 4 hours ago) and read 18534 times:

Quoting art (Reply 14):
If owners have depreciated their A380's to $0 after 10 years. surely they can find lessees/customers for a few 10-12 year old, well maintained A380's at the end of this decade? I think of holiday operators expanding capacity for long haul tourism ex-Russia, China, India over the course of the decade. If the demand from them is there, employing 10-12 year old A380's at a commensurate price would be ideal, wouldn't it? I can't think how you would move 500 tourists to far flung destinations at a lower cost.

There is no secondary market for A380s. Airbus saw to that with the complexity and cost of a highly customizable interior.


User currently offlinelightsaber From United States of America, joined Jan 2005, 13265 posts, RR: 100
Reply 23, posted (1 year 9 months 1 week 3 days 4 hours ago) and read 18381 times:
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Higher fuel prices will drive to shorter replacement cycles. That is just smart business. Hower:

Quoting gemuser (Reply 1):
It is specific to the general business and especially the tax (including deprecation) environment in their home base.

  

But fuel prices will show an impact.

Quoting cmf (Reply 18):
How does the depreciated value have any influence on if the can find lessees/customers?

If the business is run at a profit, the aircraft may be offered for less. If depreciated enough, one can sell the plane for parts.   

Lightsaer



Societies that achieve a critical mass of ideas achieve self sustaining growth; others stagnate.
User currently offlinebobmuc From Germany, joined Nov 2011, 449 posts, RR: 0
Reply 24, posted (1 year 9 months 1 week 3 days 3 hours ago) and read 18209 times:

Quoting sxf24 (Reply 22):
There is no secondary market for A380s.

I think it's to early to decide this. As art mentioned, there are already some ideas of using second-hand A380's in 5 to 10 years.

It's also way to early to decided, if the A380 (or other new airplanes) has a different life cycle compared to older types. I think the discussed situation with the A380 (eg EK replacing 10 year old airplanes) has a lot more to do with:
- busines model of the airline: using newest technology with all benefits (eg less maintenance cost, more efficient airplanes, reputation of the airline, etc.) versus flying old/used/depreciated stuff with less investment cost etc.
- other financing/leasing options today compared to 20 years ago.
- capital situation of the airline


25 Stitch : If an A380 is scrapped, it will be for the same reasons a 777 is scrapped - the value of the parts as spares exceeds the value of the aircraft as a wh
26 faro : I wonder though, from a lofty, macroeconomic point of view, are shorter replacement cycles contributing to or reducing economic efficiency? You gain
27 United_fan : By 2015,the oldest 777 wil be 20 years old,so....
28 astuteman : You talk as if these "shorter lifecycles" are now fact, when in fact they're anything of the sort. It pure conjecture, as is the notion that there is
29 faro : Granted; purely speculative on my part. I guess we would need to live through significant lease remittals post-2015 to have an appreciation of where
30 art : I take your point that changing the interior to all Y would be expensive. Why not just keep the existing high density seat layout used by one of the
31 cmf : & You always try to get as much as you can. If you look at the book value to set the price then you're not running a business on commercial terms
32 Stitch : In terms of frames that were sold and leased-back, the aftermarket may very well be the current operators as the lessors will almost assuredly prefer
33 faro : This is the case if they are taken back on operating leases. Accounting treatment (US GAAP, IFRS, etc) mandates booking of depreciation for financial
34 brons2 : What if the secondary market chooses to use the seating config as-is? I think your assessment is premature.
35 brons2 : And while we're on the subject, the 787 should be another candidate for such exchanges down the road. The 787-8 won't meet the original weight targets
36 goosebayguy : We could be approaching a situation where just a few airlines, EK, SIA, BAW, LH, will have a monopoly on ordering the 380 new whilst other airlines ca
37 KC135TopBoom : Some second hand A-380s may find a new home as P2Fs or even a P2C (pax to combi). A P2C conversion should have no problem if it is configuered as all
38 Stitch : I have wondered how fire and smoke suppression would work in such a configuration. I'm sure it could be implemented, but at what cost in terms of bot
39 bongodog1964 : One huge influence on the life of airliners is inflation. If you cast your mind back to the days of the 741 & 742 many if not all developed nation
40 Post contains images astuteman : Or chooses not to use a seating configuration at all? Based on early comments from FX I certainly wouldn't dismiss this possiblility, whatever we mig
41 Post contains images art : I'm not sure even Miachael O'Leary would take things that far.
42 Burkhard : An airline like Transaero that operates 747-300 still will take a deep look for sure.
43 frmrcapcadet : Recently a thread was discussing regulatory changes which could put an end of life on older planes. IIRC it mentioned that some of the older 737s coul
44 sxf24 : This rarely pencils out long-term for an airline, since you're increasing the gap between CASK and RASK. I talk to airlines about issues like this on
45 Stitch : I'm inclined to believe it is not a viable general-cargo freighter, but it might have a role in express cargo. I say "might" knowing full well 5X wan
46 zotan : I work in leasing. It's costly for airlines to return aircraft. Especially for ones as large as the A380. And's its very difficult for lessors to re-p
47 zotan : Inflation does not really matter in this equation since ticket prices would be going up as well. So, in fact, inflation has very little impact on the
48 lhcvg : I think that's an excellent point! At the right price, a carrier like that may well be interested in a used EK 380. Granted, we might be talking the
49 JAAlbert : Interesting! Can you share with us the sort of expenses an airline incurs in returning a leased aircraft? How much $$ are we talking about?
50 lhcvg : I think a big part is what was mentioned above about how they don't really intend for you to ever turn it in. In other words, it's not exactly like a
51 Post contains images astuteman : Can't beat having an expert put us right with such conviction......... It is of course an opinion, not a fact, as it is portrayed. FX at one time for
52 PanHAM : May be the A380-900 will be. They sill would have to have answers on the equipment for loading the upper deck The present high loaders can handle all
53 KC135TopBoom : We don't know if there will ever be an A-389, yet. That's why I think a P2C configueration might be an option. But as Stitch pointed out, designing a
54 planesmart : Are u confusing aircraft life cycles with finance life cycles? Financing commercial aircraft, whether purchase or lease, is incredibly complex. For ex
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