1. INTRODUCTION
**********************
In response to a request from Morgan Stanley Aircraft Finance (MSAF), BK
Associates, Inc. is pleased to present this report on the values of the
aircraft in the MSAF Portfolio (Portfolio) as of November 30, 1999. The
aircraft include 61 various types or models of narrow- and wide-body commercial
transport jets as well as commuter aircraft, and one spare General Electric
CF6-80C2 engine. The aircraft are identified in Figure 2-1 by aircraft type,
serial number and date of manufacture.
It should be understood that the aircraft have not been inspected for the
purpose of this appraisal. MSAF has provided BK Associates with data on the
specifications and current maintenance status for the aircraft. These data were
used to adjust values to account for current maintenance status.
Section 2 of this report presents the conclusions regarding the values of the
aircraft. Other sections describe the methodology used by BK Associates in
determining appraised values, discuss the factors affecting the market for
aircraft, and describe the experience and qualifications of BK Associates in
undertaking appraisals.
1
2. CONCLUSIONS
*********************
Based upon our familiarity with airline transport aircraft, our knowledge of
their capabilities and the uses to which they are put, our knowledge of the
marketing and leasing of new or used aircraft, and our familiarity with
aircraft generally, it is our opinion that the values for the aircraft in the
Portfolio as of November 30, 1999 are as stated in Figure 2-1, expressed in
millions of U.S. dollars.
At the request of MSAF, the values given in Figure 2-1 are as of November 30,
1999, although the date of this report is subsequent to that effective date.
Two values are given for each aircraft. Base Values assuming half-time between
major maintenance events "Half-Time Base Value" and Base Values including
appropriate financial adjustments based on our interpretation of the
maintenance summary data "Mtc Adj'd Base Value".
According to the International Society of Transport Aircraft Trading's (ISTAT)
definition of Base Value, to which BK Associates subscribes, base value is the
Appraiser's opinion of the underlying economic value of an aircraft in an open,
unrestricted, stable market environment with a reasonable balance of supply and
demand, and assumes full consideration of its "highest and best use". An
aircraft's Base Value is founded in the historical trend of values and in the
projection of value trends and presumes an arm's length, cash transaction
between willing, able and knowledgeable parties, acting prudently, with an
absence of duress and with a reasonable period of time available for marketing.
The values given in Figure 2-1 are based upon certain definitions and
assumptions regarding aircraft condition, maintenance status, and market
conditions which are
2
described more fully below and later in this report. THESE VALUES SHOULD NOT BE
USED OUTSIDE THE CONTEXT OF, OR WITHOUT KNOWLEDGE OF, THOSE ASSUMPTIONS AND
DEFINITIONS.
For those values given in Figure 2-1 that include adjustments to account for
the current maintenance status, the adjustments are approximate, based on
industry average costs, and normally would include an adjustment for the time
remaining to a "C" check, time remaining to a "D" check, time remaining to
landing gear overhaul and time remaining to a heavy shop visit on engines. In
some cases, sufficient relevant data were not available to make all such
adjustments and in these instances they were assumed to be at half-time.
Also, no consideration has been given to cash maintenance reserve payments or
security deposits that are likely paid by the lessees on the aircraft in the
Portfolio. These payments are intended to offset the very costs for which the
maintenance adjustments are applied to the half-time values.
BK Associates, Inc. has no present or contemplated future interest in the
aircraft, nor any interest that would preclude our making a fair and unbiased
estimate. This appraisal represents the opinion of BK Associates, Inc. and
reflects our best judgment based on the information available to us at the time
of preparation. It is not given as a recommendation, or as an inducement, for
any financial transaction and further, BK Associates assumes no responsibility
or legal liability for any action taken or not taken by the addressee, or any
other party, with regard to the appraised equipment. By accepting this
appraisal, the addressee agrees that BK Associates shall bear no such
responsibility or legal liability. This appraisal is prepared for the use of
the addressee and shall not be provided to other parties without the express
consent of the addressee.
BK ASSOCIATES, INC.
R. L. Britton
3
Vice President
ISTAT Certified Appraiser
4
FIGURE I
MORGAN STANLEY
MSAF PORTFOLIO - BASE VALUES
NOVEMBER 30, 1999
HALF TIME MTC ADJ'D
AIRCRAFT SERIAL MFG. BASE VALUE BASE VALUE
TYPE NUMBER YEAR ( MIL $ ) ( MIL $ )
---- ------ ---- --------- ---------
1 A300-600R 555 1990 46.35 46.87
2 A300-600R 625 1992 52.85 53.11
3 A310-300 409 1985 26.70 27.02
4 A310-300 410 1985 26.70 27.40
5 A310-300 437 1987 31.70 33.26
6 A320-200 279 1992 29.60 31.24
7 A320-200 393 1993 29.90 31.19
8 A320-200 397 1993 31.10 31.89
9 A320-200 414 1993 29.90 30.96
10 A320-200 428 1994 31.40 32.63
11 A320-200 446 1993 31.10 31.10
12 A321-100 557 1995 44.30 45.99
13 A321-100 597 1996 46.00 45.16
14 A330-300 54 1994 82.20 81.86
15 A340-300 94 1995 92.65 92.32
16 B737-300 23255 1985 13.70 13.55
17 B737-300 23256 1985 13.70 14.50
18 B737-300 24299 1988 18.70 18.79
19 B737-300 24449 1990 21.65 21.99
20 B737-300 25161 1992 24.50 25.51
21 B737-300 26295 1993 26.25 26.02
22 B737-300 26309 1994 27.70 27.70
23 B737-300 27635 1995 29.15 28.73
24 B737-300F 23811 1987 18.65 19.00
25 B737-300QC 23788 1987 18.25 18.10
26 B737-400 24234 1988 19.15 20.19
27 B737-400 24707 1991 24.10 24.96
28 B737-400 25104 1993 27.00 26.53
29 B737-400 25105 1993 26.60 26.07
30 B737-400 25371 1992 25.55 24.17
31 B737-400 26279 1992 25.55 24.62
32 B737-400 26291 1993 27.00 26.76
33 B737-400 26308 1994 28.45 28.26
34 B737-500 25165 1993 18.85 17.55
35 B737-500 26304 1994 21.05 20.06
36 B747-300B 24106 1988 60.40 59.94
37 B747-400 24955 1991 104.80 106.53
38 B757-200ER 23767 1987 30.40 29.79
5
39 B757-200ER 24260 1988 31.85 33.02
40 B757-200ER 24367 1989 33.90 31.34
41 B757-200ER 24965 1992 40.10 39.97
42 B757-200ER 25044 1991 38.05 39.21
43 B757-200ER 26266 1993 42.20 41.87
44 B757-200ER 26272 1994 44.20 42.93
45 B757-200ER 28160 1996 48.35 49.45
46 B767-200ER 23807 1987 31.65 31.08
47 B767-300ER 24798 1990 53.25 53.67
48 B767-300ER 24875 1991 56.55 55.07
49 B767-300ER 25132 1992 59.85 59.36
50 B767-300ER 26256 1993 63.15 61.96
51 B767-300ER 26260 1994 66.50 64.75
52 F50 20232 1991 7.05 7.34
53 F50 20233 1991 7.05 7.30
54 F70 11564 1995 14.10 14.10
55 F70 11565 1996 15.20 15.20
56 F70 11569 1996 15.20 15.20
57 MD82 49825 1989 18.35 17.32
58 MD83 49657 1988 19.25 20.09
59 MD83 49822 1988 19.25 18.82
60 MD83 49824 1989 20.50 21.36
61 MD83 53050 1990 21.75 21.12
SPARE ENGINE 704279 1995 5.70 6.28
TOTALS 2056.60 2059.17
6
3. DISCUSSION OF MARKET
*******************************
The aircraft values presented in this report are based on careful consideration
of the impact of many factors that affect the market for new and used aircraft.
Ultimately, aircraft values depend almost entirely on supply and demand. A
shortage of aircraft or an unexpected increase in demand for air transportation
tends to increase values of aircraft, and conversely, a decline in passenger
demand for air transportation will bring about surplus aircraft with decreased
values. If the market is balanced between supply and demand, the long term
trend of the base value is determined from historical and projected value
trends, adjusted to account for factors that influence the base value. These
factors include:
o Suitability of available aircraft to the operator's requirements.
o The cost of newly manufactured aircraft.
o Operating cost and purchase price.
o Regulatory factors.
o Remaining useful life.
In one way, these factors are merely a subset of the supply and demand
analysis. For example, a regulation that requires a certain aircraft type to be
retired from the fleet has an end result of reduced supply, as does anticipated
end of useful life.
Actual aircraft sales data are a most important factor in the determination of
values. Recent sales, in addition to influencing current asking and offering
prices, document and support current market values. In addition, they become
the database on which base value trends are developed. The cost of newly
manufactured aircraft will also have an influence on the value that the
marketplace sets for an aircraft, the production of which is almost always
associated with equal demand from an order having been placed.
7
These sales data, our analysis of the other market factors along with current
and projected supply and demand are discussed in this section of the report.
3.1 Current Demand and Availability
Changes in the sensitive balance between demand and availability of aircraft
greatly affect current market values. Data from three recent market cycles
confirm that aircraft values followed demand and availability trends. Popular
used wide-body aircraft like the DC10-30 were relatively scarce in the high
traffic growth years of 1987-1990 and the DC10-30 commanded premium sale prices
as high as $45 million. In the early 1990s when there was a surplus of
wide-body aircraft, including the DC10, only the very best and youngest DC10s
were worth more than $20 million. Now, during the First Quarter of 2000,
availability of DC10-30s has been reduced to about seven, and it is common to
hear values of $15 to $20 million quoted for relatively old DC10s while similar
aged B747s, with 30 on the market, are around $10 million.
Even though worldwide traffic growth averaged eight percent per year during the
past 30 years, the negative growth in 1991 resulting from the Gulf War
coinciding with the start of a worldwide recession, resulted in increasing
numbers of aircraft becoming excess to airline requirements. The surplus of
excess aircraft was exacerbated by coinciding with delivery of 826 new jet
aircraft from the manufacturers in 1991. This was the result of increased
production rates intended to satisfy orders placed during the high growth
period preceding the recession. The 826 aircraft delivered in 1991 (followed by
790 in 1992) was double the average annual deliveries of 409 during the 1980s
and represented 7.8 percent of the worldwide fleet. The manufacturers blame
over-optimistic growth projections by airlines and speculative orders by
leasing companies for the excess supply of aircraft at that time. While they
now claim the airlines are more prudent in their current order cycle, it is
interesting to note that 1,012 jet aircraft, including regional jets, were
delivered in 1998, representing some 7.8 percent of the fleet.
8
Figure 3-1 shows the recent history and trend of the supply of aircraft. In
1989 about 300 aircraft were listed by BACK Information Services (BACK)1 as
being available for sale or lease. Note that even in the "balanced" or "strong"
market of 1989, the number was not near zero. There are always some aircraft
"in the float" and available due to changing airline requirements or upcoming
lease expirations. BK Associates believes this number is about two percent of
the world fleet. It should also be noted that some portion of the 300 aircraft
for sale were stored in the desert and their owners did not really expect them
to be returned to service. As the recession developed, the number of jet
transport aircraft on the market in any given month increased to a peak of
approximately 800 aircraft in 1991. Since that time, the number of aircraft
reported to be available for sale or lease gradually decreased to 185 in
mid-1996. Since then, according to our analysis of the BACK data, it has been
increasing steadily and now is 514 aircraft, including 322 narrow-bodies and
192 wide-bodies. The number of aircraft available is now at its highest in five
years. This is partly because many Stage 2 aircraft are likely being retired
because of the pending noise deadline in North America. They are offered "for
sale" by the owners but it is not likely that many will return to service
unless they are hushed. This does not explain the sharply increasing number of
twin-aisle aircraft for sale. They are nearly all Stage 3 and not affected by
the noise rules.
- ---------
1 Starting in 1987, Federal Express Aviation Services, Inc. (FEASI)
accumulated and published data on airline fleets and aircraft available
for sale or lease. In January 1997, the business was acquired by BACK
Information Services, a division of BACK Associates, Inc. The same data
are now published by BACK.
9
Figure 3-1
[GRAPHIC OMITTED]
Among the jet aircraft types in the MSAF Portfolio, the numbers of aircraft
listed as being for lease or sale are as follows:
No. for
Aircraft Type Sale or Lease
------------- -------------
A300-600R 7
A310-300 11
A320 4
A321 1
A330 3
A340 2
B737-300 20
B737-400 9
B737-500 2
B747-300 10
B747-400 0
B757 10
B767-200 7
B767-300 9
MD82 4
MD83 0
In the commuter marketplace, it is difficult to determine availability of
aircraft and impact on current market prices. Manufacturers are usually
involved in used commuter aircraft
10
re-marketing and, to some extent, control the market. They are usually willing
to take aircraft as trade-ins on new models and they lease aircraft to
operators who often do not have the cash or credit for an outright purchase. As
a result, there are almost always some aircraft "in the float", including
repossession from one airline awaiting placement with another. Thus, there are
usually a few commuter aircraft of each type available for sale, but only
occasionally are there enough advertised on the market to affect current prices
dramatically.
Another difficulty in determining supply and demand is the evolving nature of
the characterization of "commuter aircraft". Generally we think of the commuter
aircraft fleet as consisting of those powered by turboprop engines or those
smaller than a certain size. In recent years, however, small jets like the
Canadair, Embraer and AVRO RJs and the Fokker 70 and 100 have been introduced.
They have been given missions that both compete with and complement the
traditional commuter turboprop aircraft, as well as competing at the lower end
of the major airlines' fleets.
At the other extreme, we have older turboprop aircraft like the Convair 580s,
Fokker F27s, YS-11s and Electras which are lumped with the other commuter
aircraft today even though they were originally introduced as flagships of the
major airlines' fleets. They are classed as "commuter aircraft" today because
they are turboprops and generally have no more than 50 to 60 seats but many of
them are not in commuter airline service.
For purposes of its annual forecast of traffic, the FAA now defines commuter
airlines as those that provide regularly scheduled passenger service and whose
fleets are composed predominately of aircraft having 50 seats or less.
Figure 3-2 shows the recent history and trend of the supply of
commuter/regional aircraft. Since 1998 these data are based on BACK Information
Services (BACK) data. Prior to that, the data on aircraft available are based
on BK Associates analysis of various industry publications that regularly list
commuter aircraft that are available for sale or lease.
11
While these listings do not include all aircraft that might be available, they
do give an indication of the trend in aircraft availability and whether
sufficient numbers are for sale to put pressure on current asking prices. The
surplus of commuter aircraft during the early 1990s never became as severe as
for the larger jets. Commuter traffic growth did not turn negative in 1991 and
remained relatively strong during the subsequent years. Commuter turboprop
aircraft availability increased sharply between March and August 1990, and then
more gradually and steadily to more than 400 by November 1992. Many of these
were older, less desirable and less efficient aircraft like CV580s, F27s,
DHC-6s and YS11s. After that, the number of available aircraft gradually
dropped to less than 300 by mid-1996 and has averaged about 265 at any two
since then. Currently, there are 312 aircraft available including 280
turboprops and 32 regional jets.
Figure 3-2
[GRAPHIC OMITTED]
Among the Portfolio aircraft, the numbers listed as available for sale or lease
are as shown below:
No. for
Aircraft Type Sale or Lease
------------- -------------
F50 2
F70 0
3.2 Projected Supply and Demand
12
There is no doubt that air travel is a long term worldwide growth industry.
Growth in air travel has consistently followed world economic growth as
measured by the growth in Gross Domestic Product (GDP) - the total output of
goods and services within a country. Although the world's economy is cyclic
resulting in periodic recessions or reduced growth periods, on average world
GDP has grown at a rate of 3.6 percent per year since 1960 and is expected to
continue to grow at 2.7 percent per year over the next 10 years. Air traffic,
measured in revenue passenger miles (RPMs), or one paying passenger flying one
mile, grew at an average rate of 6.3 percent per year since 1970.
The growth in RPMs has consistently and persistently tracked the growth in
world GDP. While the timing of the peaks and valleys may be offset, the average
growth in traffic has been around twice the growth in GDP. Thus, forecasts of
GDP growth have been the principal input for forecasts of air travel demand
and, in turn, forecasts of new aircraft production requirements. The major
airframe manufacturers as well as the U.S. and international aviation
organizations devote full-time staffs to the task of determining future demand
for aircraft. BK Associates regularly reviews the published forecasts and
analyzes the impact projected supply and demand is likely to have on current
and forecast values. As discussed below, these forecasts generally expect
traffic growth to average about 5.0 percent per year during the next decade and
about 4.9 percent per year during the next 20 years.
While there is a consensus that growth will average about five percent per
year, because of the cyclic nature of the industry, there will be short term
downturns where growth will be below the five percent average. As we saw in the
early 1990s, coincidence of an economic recession with a period of large order
backlogs will undoubtedly create short term surpluses of aircraft that will
depress values. Similarly, now, the current difficulties in Asia have resulted
in lower growth forecasts for the next several years.
3.2.1 Passenger Traffic
13
The latest worldwide revenue passenger-mile (RPM) forecasts issued by the
manufacturers, the International Air Transport Association (IATA), the
International Civil Aviation Organization (ICAO) and the FAA show annual
percent growth rates for passenger traffic as follows:
TRAFFIC GROWTH RATE
Annual Increase
Forecaster Period (Percent)
---------- ------ ---------
Airbus 1999 - 2018 5.00
Boeing 1999 - 2018 4.70
ICAO 1995 - 2005 5.50
FAA (US carriers only) 1999 - 2010 4.50
IATA (Intl. Only) 1998 - 2002 5.50
Given the relationship between GDP and RPMs discussed above, it is not
surprising that most of the forecasts expect traffic growth to approximate five
percent per year or more. Long term world GDP is expected to grow 2.7 to 2.8
percent annually while the more mature U.S. economy is expected to grow at 2.3
percent per year. Thus the FAA forecast for traffic growth is lower than the
other forecasts.
Traffic growth rates in more mature economies are smaller. Boeing forecasts
traffic growth in North America and Intra-Europe at 3.0 and 4.5 percent,
respectively. Despite the current problems, the highest growth is expected in
Asia, in general, and especially in China. However, the expectations have been
reduced dramatically. Forecasts made several years ago generally expected the
problems in Asia to be short-lived. Before the Asian economic crisis set-in in
1998, GDP in Asia was expected to grow at 4.1 percent per year over the next
five years. Now forecast growth is 0.7 percent per year. Furthermore, it is now
expected to affect the forecast for up to 20 years. A new forecast of GDP
growth for Japan now expects GDP after 20 years to be 13 percent lower than was
forecast in 1997. Reduced GDP growth translates into reduced traffic growth.
14
Traffic growth in China is now expected to be only 6.1 percent per year over
the next 20 years, down from 8.1 percent in the previous Boeing forecasts.
Similarly, reduced GDP and traffic growth is now expected in South America due
to a recession in Brazil and in the Middle East due to diminished demand for
oil. Although these reductions will not have the longer lasting affect that
those in Asia will have.
Demand for particular aircraft sizes requires a more detailed analysis of the
overall passenger traffic growth rates. The manufacturers' forecasts are
reasonably consistent but differ in length of term, the date they were issued
and definition of size categories. Airbus is expecting more demand in the large
747-size category than Boeing. BK Associates chose to present data from the
Boeing forecast in the discussion that follows. We believe it represents the
expectations of the industry.
3.2.2 Fleet Size and Composition
Traditionally, wide-body aircraft, with some exceptions, were normally operated
on long haul international routes and narrow-body on domestic or regional
routes. Since the traffic growth forecasts are different for each, it is
important that the major airframe manufacturers include in their forecasts an
estimate for new jet aircraft by size categories. In the past, the forecasts
were categorized by "wide-body" and "narrow-body".
More recently the manufacturers have forecast by seat size categories. With
this breakdown, the "wide-body" category might be more appropriately named
long-haul, high capacity aircraft or "large" aircraft and "narrow-body" would
refer to shorter haul, lower capacity aircraft or "small" aircraft. This
problem of size definition has been exacerbated in recent years by the
introduction of regional jets like the Canadair RJ, Embraer 145 and the Fokker
70 which are included in Boeing's jet forecast even though they formerly were
grouped with, and competed with, the larger commuter turboprops like the ATR72
and
15
Saab 2000. Also there are some large wide-bodies that are used on relatively
short regional routes.
Starting with the 1996 forecast, Boeing went to a more meaningful
categorization. The aircraft are considered to be "Single-Aisle", "Intermediate
Twin-Aisle" or "Large", regardless of mission. Single-aisle includes A320s,
B757s and anything smaller. Large aircraft are defined as those with more than
400 seats, essentially including only the B747 and any future larger aircraft.
Everything in between is Intermediate twin-aisle, which by twin-aisle
definition makes them part of the former "wide-body" category. This group
includes such aircraft as A300s, B767s, B777s, MD11s, DC10s, A330s and A340s.
Now, in its latest (1999) forecast, Boeing has added discussion of "Regional
Jets" as a sub-category in the single-aisle group. The Regional Jets include
those single-aisle aircraft that have fewer than 107 seats.
Having defined the categories, for convenience, the following discussion will
refer to them as "small", which includes "regional jets", "intermediate" and
"large", as Boeing does in its forecast.
The Boeing forecast for new jet aircraft deliveries (including freighters and
combis) over the next 20 years includes 14,804 small, 4,413 intermediate and
933 large aircraft. The small aircraft total includes 4,116 regional jets. The
total of 20,150 new aircraft represents 160 percent of the existing worldwide
fleet as of year end 1998. The forecast suggests that 73 percent of the new
aircraft will be small or single-aisle. Over 20 percent of new deliveries are
expected to be regional jets. Freighters will represent 650 of the new aircraft
added to the fleet.
While large numbers of small aircraft will be needed, their share of the world
fleet will decline to 54 percent of the fleet versus 63 percent today because
the markets they serve are not growing as rapidly. In the Asia Pacific region
where growth will be largest, the
16
small single-aisle aircraft are used mostly on domestic routes. The geography
of the region, with many island nations, causes most of the traffic to be
longer haul and it is best served by the intermediate aircraft, which will
increase from 19 to 23 percent of the fleet by 2018. However, airlines will
continue to acquire large numbers of small aircraft to provide more frequencies
in domestic services and short-range international services.
The proportion of large airplanes in the fleet will decline from eight percent
of the fleet today to six percent by 2018. With extended range twin-engine
overwater operations (ETOPS) capability, the intermediate aircraft can serve
most routes that in the past could only be served by 747s. Airlines, responding
to market forces, would much prefer to satisfy the demand with increased
frequencies of intermediate aircraft rather than infrequent flights with large
aircraft. Eventually, the need for large airplanes will be concentrated in a
small number of high density markets. Over 80 percent of new deliveries in
North America will be single-aisle or regional jets.
Boeing expects that the domestic U.S. will continue to be the largest market
for small aircraft. Flexibility in scheduling has driven the U.S. airlines to
smaller aircraft and it appears this will be the preferred fleet for the next
10 years. The need to replace an aging fleet, especially Stage 2 aircraft, will
also drive the U.S. market.
While the total number of forecast deliveries is of concern to the
manufacturers and is relevant to future value forecasts, the current value is
more likely to be affected only by expected deliveries over the next several
years. As such, a listing of firm order backlog as shown below may be more
meaningful, however, it is important to recognize that the backlog can change
quickly through cancellations or additional orders. These data are from the
October 1999 issue of BACK Commercial Jet Fleets.
17
FIRM ORDER BACKLOG
Small Intermediate Large
Period Aircraft Aircraft Aircraft Total
------ -------- -------- -------- -----
Airbus 1999-2008+ 1,031 300 - 1,331
Boeing 1999-2008+ 1,004 314 73 1,391
Boeing (MDC) 1999-2001 17 9 - 26
BAe 1999-2000 14 - - 14
Canadair 1999-2004 341 - - 341
Dornier 1999-2008+ 163 - - 163
Embraer 1999-2006 334 - - 334
Considering the total firm order backlog above of 3,600, spread over a period
of up to nine years, is less than twice the total deliveries during 1991 and
1992 suggests a shortage is likely to develop unless traffic growth does not
meet expectations.
Another relevant comparison in the forecast is the identification of those
aircraft expected to be replacements and those aircraft needed for passenger
traffic growth. Most replacements are for passenger aircraft that are retired
from service and a smaller number of replacements are due to loss because of
accident, or conversion to freighter aircraft.
Boeing forecasts that 4,305 aircraft will be retired from commercial service
over the next 20 years. This is likely to be front-loaded since many
retirements will occur by 2002 when noise regulations are fully in effect,
first in the U.S. by December 1999 and then in Europe by April 2002.
However, since capacity is replaced seat-by-seat rather than
aircraft-by-aircraft, it is more difficult to predict fleet composition. For
example, a 150-seat aircraft may be replaced by a 200-seat aircraft. Thus, part
of the transaction is for replacement of a retiring aircraft and part serves
traffic growth. Boeing estimates that one-fourth of the new aircraft will be
replacement capacity and three-fourths will be for growth.
18
As with the delivery forecasts above, the long term mix between replacement
aircraft and growth aircraft is not so relevant to current values. In the short
term, retirements will influence values to a greater extent but it is difficult
to quantify them.
3.2.3 Commuter Traffic and Commuter Fleet
Reliable data available to BK Associates on the commuter industry are mostly
from U.S. and, to a lesser extent, European sources. However, since some 36
percent of the commuter fleet is with U.S. airlines and since many of the
trends started in the U.S. are now spreading to Europe, as restrictions are
removed, a discussion of the U.S. market is likely representative of worldwide
trends.
The commuter/regional side of the airline industry in the U.S. has been
undergoing an evolution during the last decade stemming from three factors.
First, the consolidation of regional operators, second, the integration of
regional operators into the U.S. major airline operations, and third, the
introduction and proliferation of regional jets.
Since 1981, the number of independent regional operators has declined by
approximately 59 percent, from 250 to 102 operators in 1998, or nearly 10
carriers per year. In Europe, which accounts for 19.5 percent of the commuter
fleet, the number of operators has remained steady between 47 and 53 over the
last five years. Industry predictions are for this consolidation trend to
continue into the near term future albeit at a smaller annual rate of decline.
The second trend, integration of the commuter/regional industry into the
major's operations, brought about a closer operational liaison between the
partnerships through development of code-sharing and the major's outright
purchase of equity interest in selected commuter/regional operators. These
relationships have provided opportunities for route rationalization resulting
in transfer of selected short haul routes from the major carrier to the
regional partner. The exceptional growth of the regionals over the past
19
decade is the result in large part to the route transfer activities. This
partnership alliance, in conjunction with the decline in number of
commuter/regional operators through mergers and acquisitions, has served to
strengthen many of the remaining regional carriers to dominate their field.
This is evidenced by the fact that the top 10 carrier/corporate groups (Delta
Connection, for example, includes several regional airlines) carried 88 percent
of the total U.S. regional passenger enplanements in 1998 and the top 50
individual regional airlines accounted for 99.1 percent of enplanements.
The true regional jet, first introduced by Comair in 1992, has grown to a fleet
of 488 aircraft as of October 1999. An additional 845 were on order at that
time. In addition, several other models like the BAe 146 and the Fokker 100 and
70 now fit the definition of regional jets, although they were not originally
designed for nor intended for "commuter airline" service. The jets now account
for more than 28 percent of the regional fleet, including those in service and
on order.
The jets offer more opportunities for route rationalization with the major
partners as thin traffic routes can be transferred from the major airline to
the regional partner while still providing jet service.
While the demand for commuter aircraft is encompassed by the worldwide
passenger demand, the commuter component has characteristics that are distinct
from the demand for larger jet aircraft. As "commuter airlines" begin operating
more and more larger aircraft including jet aircraft it is more difficult to
separate the commuter component of demand from that of the larger national and
international airlines. Thus, it is more difficult to get traffic data and
forecasts that solely address commuter airlines.
It is estimated that the U.S. commuter airlines represent about one half of the
world commuter/regional traffic and the European commuter/ regional airlines
account for about 30 percent of the world total. The U.S. regional/commuter
airline industry has been the fastest growing sector of the U.S. aviation
community with growth exceeding 250
20
percent thus far in the 1990s. Passenger enplanements in 1998 were up 7.2
percent and revenue passenger miles (RPMs) were up 11.0 percent over 1997.
According to the European Regional Airlines Association (ERA), traffic growth
in Europe has remained between 12 and 17 percent throughout the past five
years.
The latest FAA forecast issued about one year ago in early 1999, predicts
continued high growth levels in traffic, enplanements, aircraft size and
average stage length over the next 12 years. Their assumptions include the
continuation of the Regionals to outperform the large commercial air carriers
in large part because of the continuing increase in demand and the increasing
quantity of new state-of-the-art aircraft. The traffic forecast shows RPM
growth averaging 7.5 percent per annum and growth in passenger enplanements
averaging 5.4 percent over the next 12 years. This is higher than the forecasts
for large U.S. trunk carrier growth which is expected to be 3.6 percent per
year.
U.S. regional airlines operated 2,039 aircraft in 1998. They forecast this
fleet to grow at a 2.9 percent annual rate such that it will number 2,886 units
by the end of the forecast period in 2010. Average stage length for commuters
is expected to increase to 306 miles by 2010 resulting largely from the
introduction of faster turboprops and the regional jets which accommodate
longer stage lengths in the same flight time. Additionally, the FAA predicts a
continuation in the shift to larger aircraft. In 1980 the average was 15.1
seats per aircraft and in 1998 the average had grown to 33.1 seats. By the year
2010 they predict this to average approximately 42.2 seats per aircraft. Figure
3-3 illustrates the forecast change in percentage of the total U.S. fleet for
each seat category between 1998 and 2010.
As Figure 3-3 shows the bulk of the current fleet consists of aircraft under 20
seats in size. By 2010 this category will decline to some 685 aircraft
representing only 23.8 percent of the forecast fleet. This decrease is due to
the expected retirement of a large number of old aircraft in the under-20 seat
categories and the FAA's requirement that aircraft of this size be operated
under FAR Part 121 rules, instead of the less stringent
21
Part 135. Part 121 governs large aircraft in commercial service such as jets
and mandates required equipment and flight crew flight and rest times, which
although acceptable on a B747 say, make a Beech 1900D uneconomic to operate.
While the under-20 seat categories are expected to decrease, the 20 to 40-seat
category is expected to increase both in number and as a percent of the total
from 35.1 to 39.4 percent. The FAA forecast suggests that some 350 new aircraft
in the 20 to 40-seat category will be required in the next 12 years in the U.S.
alone.
Figure 3-3
[GRAPHIC OMITTED]
For the world market, Bombardier in its latest forecast predicts the world
fleet (including the U.S.) will grow with delivery of 8,232 aircraft by 2014
from its present size of 6,560. They expect 1,028 new aircraft to be under 19
seats or 12 percent of deliveries. In the 20 to 40-seat group, they expect
1,830 deliveries. In the over 40-seat group, Bombardier expects 5,374 new
deliveries worldwide, which is dramatically different from the U.S. forecast.
Since the time periods are different and the number of retirements are not
addressed, direct comparison is not possible. However, even if all of the
existing fleet were retired, this would mean the U.S. deliveries of large
aircraft would only be 753 or 14
22
percent of the world total. This would not be consistent with the current or
past composition of the fleet.
While the total number of forecast deliveries is of concern to the
manufacturers and is relevant to future value forecasts, the FMV is more likely
to be affected only by expected deliveries over the next several years and
currently surplus aircraft. As such, a listing of the order backlog and current
availability as shown below may be more meaningful, but recognizing that the
backlog can change quickly through cancellations or additional orders. These
data are from the October 1999 issue of BACK Commercial Jet Fleets.
BACKLOG AND AVAILABILITY
(October 1999)
Under 20-Seat 20 to 70-Seat Small Jet
Mfgr. Aircraft Aircraft Aircraft Total
----- -------- -------- -------- -----
BACKLOG
ATR 36 36
Avro 14 14
Beech 10 10
Canadair 341 341
Casa/IPTN 3 3
DHC 93 93
Embraer 1 334 335
Fairchild/Dornier 7 163 170
Saab 1 1
Total 10 141 852 1,003
AVAILABLE (11/99)122 128 27
Source: Industry data.
The small jets are included because they will probably end up satisfying some
of the regional airlines demand for more capacity. However, excluding them for
the moment, the order backlog above falls considerably short of the demand
forecast even if one assumes all of the currently idle or available aircraft
are returned to service.
23
The expected decrease in the under 20 seat size fleet from 1,017 aircraft to
685 is consistent with the small order backlog. These are likely destined to
replace retired small aircraft. In the larger turboprop category, however, the
order backlog falls far short of the expected increase in the fleet of 1,078
aircraft. Even if the jets take some of this market, considering some
replacements for older large aircraft as well, there is a need for more than
500 new aircraft beyond those already ordered.
3.2.4 Future Balance Between Demand and Supply
While the manufacturers develop their forecasts to determine a delivery
schedule for aircraft, BK Associates is concerned with the balance between
supply and demand which determines the surplus or shortage of aircraft units in
the world fleet. A forecast of the balance between supply and demand
facilitates the determination of future values for aircraft.
Demand for commercial aircraft is mostly a function of passenger demand and to
a far lesser extent for cargo lift. Based on our analysis of industry data
including the manufacturers' forecasts, BK Associates believes that revenue
passenger-mile (RPM) growth rates will be about five percent overall between
1998 and 2007.
Using these data, one can plot curves of demand and supply to determine at what
future times there will be an excess or shortage of available aircraft and
estimate the corresponding effect on aircraft values. The demand curve is
derived from an estimate of RPMs. These RPMs are converted to aircraft units
using averaged load factors, weighted average number of seats and averaged
operational performance factors for the model of aircraft. The supply forecast
curve comprises the current actual world operating fleet plus stored aircraft
available for sale or lease less obsolete models such as B707s and BAC1-11s and
a necessary market float (130 aircraft for single-aisle aircraft and 50 for
twin-aisle aircraft). Supply forecast for subsequent years includes the
following assumptions: annual fleet retirement rates based on 30-year life
expectancy for single-
24
aisle fleets and 28 years for twin-aisle fleets; annual adjustments for
aircraft lost to accidents made at a rate of .002 percent of the operating
fleet per year; and new aircraft delivery rates based on the delivery schedule
for firm orders.
Plotting these data on a graph shows periods during which there is an excess
supply of aircraft and the crossover point at which there is balance between
supply and demand. Beyond that point, a hypothetical shortage of aircraft
occurs which will not likely occur because new orders will be placed to satisfy
the demand with additions to the fleet.
These graphs have been included in BK Associates reports during the past few
years, but are not included here. As the supply versus demand situation has
developed, the graphs have become less meaningful visually, especially for the
single-aisle fleet. For the single-aisle fleet, the data show the market
returned to balance in 1996 and is in balance now.
For the twin-aisle fleet, the data continue to show, as they have for the past
several years, that the excess supply of aircraft will continue and gradually
be reduced to balance by 1999 after which an increase in orders will be
required to satisfy demand.
3.3 Suitability of the Aircraft
The subject of suitability of the aircraft to an operator's requirements cannot
be readily separated from the demand for lift and operating costs. To create
any demand for a particular aircraft type there must be a buyer with
requirements that are satisfied by that type of aircraft. Range and seating
capacity or payload, along with operating costs, are normally the parameters
crucial to the buyer's decision.
BK Associates regularly reviews the U.S. airlines' operating statistics as
reported to the U.S. Department of Transportation. The data are sometimes
incomplete or may reflect some irregularities in a single reporting period,
such as an extremely high maintenance
25
cost for a particular aircraft. Even with the anomalies cited above the
statistics are reliable over time and a good statistical base.
The range and operating cost data shown in Figure 3-4 are derived from U.S.
airline reports to the Department of Transportation and are meant to give a
rough estimate of the relative operating cost advantage or disadvantage between
competing models. These data for passenger aircraft are based on the average of
the quarterly reports for the last four quarters that are available. Since
quarterly data can be distorted by, for example, a period of bad weather delays
which increase fuel expenditures, the averaged data is more meaningful. It
should be understood they include only U.S. airlines and are averages. Any one
airline may have costs above or below the average and in some cases, there may
be only one airline operating that type. The data include only crew, fuel,
insurance, taxes, and maintenance costs. Depreciation and rentals are excluded
since they are not costs that are a function of the aircraft's performance or
specifications. The data do not suggest cost comparisons between specific
aircraft but rather more general comparisons such as cost per seat-hour between
older Stage 2 aircraft and more modern fuel-efficient models.
Comparable data for the commuter turboprop aircraft are not available.
Another measure of the suitability of an aircraft is indicated by its customer
base. The more orders a manufacturer receives for an aircraft and the size of
its worldwide operator base are an indication of the aircraft's popularity and
suitability. More important, it is an indication of the extent of the potential
market were it necessary to sell or lease an aircraft. The more operators and
aircraft of a type, the more likely one could be required as an addition to a
fleet.
Figures 3-5, 3-6 and 3-7 present data on selected single-aisle, twin-aisle and
regional aircraft types that indicate the extent of the acceptability of each
model. In each case the number of aircraft in service or on order is plotted
against the number of airlines that operate that aircraft type. The data are as
of January or July 1999. However, since the
26
composition of the fleet does not change that rapidly, they are still
representative of the current fleet.
Figure 3-4
EXAMPLES OF PAYLOAD, RANGE & OPERATING COST
FOR SELECTED AIRCRAFT
Typical Range
Aircraft Typical Fully Loaded Direct Operating Cost
Type Seating (N.Mi.) $/Block Hr. $/Block Hr./Seats
---- ------- ------- ----------- -----------------
A320-200 148 2,850 1,681 11.36
B737-300 132 2,200 1,419 10.75
B737-400 142 2,400 1,271 8.95
B737-500 110 2,800 1,435 13.05
B757-200 186 2,800 1,900 10.22
MD82 155 2,150 1,600 11.51
MD83 139 2,500 1,600 11.51
B767-300ER 262 6,200 2,480 11.75
A300-600R 241 4,250 2,904 12.05
A310 218 4,850 N/A N/A
A321 186 2,350 N/A N/A
A330 328 4,750 N/A N/A
A340 295 6,750 N/A N/A
B747-400 374 7,300 4,727 12.64
B767-200ER 181 3,900 2,621 14.48
The presentation suggests that an aircraft's acceptability or popularity is
better the further to the right and to the top is its position on the chart.
Thus, the widest acceptance is for aircraft in the upper right quadrant and the
least is for those in the lower left. Therefore, those aircraft like the B757,
plotted in the top half and in or near the upper right quartern, should
obviously be the ones which will be most attractive to a buyer, especially a
second or third tier carrier who needs to be assured there will be a good
chance spare parts and technical assistance can be readily obtained from a
third party if the plane goes unserviceable in a remote station. Aircraft in
the other quarterns, positioned towards the center, will still be attractive,
as one has to apply some subjective reasoning to charts such
27
Figure 3-5
[GRAPHIC OMITTED]
Figure 3-6
[GRAPHIC OMITTED]
28
Figure 3-7
[GRAPHIC OMITTED]
as these. For example, the B727-200 and B737-200 are approaching the end of
their economic market attractiveness with the limits imposed by noise rules
over the next seven years forcing operators to retire or hush kit these
particular models.
Similarly, with the regional aircraft, it would appear that there is a
widespread operator base for each of these except the relatively new DO328.
However, a large concentration of each of these types is with U.S. airlines. If
American Airlines, for example, decided to drop the Saab 340 or the ATR42, it
would have a dramatic effect on the market despite the existence of 31 other
Saab operators and 60 other ATR operators. Each of the models above dominates
the commuter fleet of one or more major U.S. airlines. For example, Atlantic
Southeast, a Delta connector, accounts for more than 20 percent of the world's
EMB120 fleet. Similarly, Flagship Airlines, an American Airlines commuter,
accounts for more than 15 percent of the Saab 340 fleet while U.S. Air Express
and Northwest Airlink combine for nearly 44 percent of the DHC-100/-200
operating fleet, and Comair accounts for 30 percent of the Canadair RJs.
29
3.4 Regulatory Factors
While most factors that affect aircraft values are market related, there are
others that are purely geopolitical (such as fuel supplies) or regulatory (such
as noise; airport access and airport slot restrictions; and regulatory
maintenance procedures required for aging aircraft). It is not possible to
predict the occurrence of geopolitical events such as an interruption in fuel
supplies by producing nations, and for the present, there does not appear to be
any threat of a fuel supply or fuel cost related crisis that would affect
aircraft values. However, noise regulations and regulatory maintenance in the
form of Airworthiness Directives are having an increasing effect on values.
3.4.1 Noise Regulations
The International Civil Aviation Organization (ICAO), the European Commission,
and the United States have adopted or proposed regulations that would restrict
the operations of noisier aircraft.
The regulatory noise restrictions and airport access restrictions are a threat
to the retention of values for all aircraft that are perceived to be
excessively noisy and, particularly, ICAO Annex 16 Chapter 2 and Federal
Aviation Regulations (FAR) Part 36 Stage 2 aircraft. Conversely, values of
quiet aircraft could be greatly enhanced by such restrictions. More recently
the European Commission has proposed even more stringent requirements on
aircraft that achieve Stage 3 through hush kits.
All of the Aircraft in the MSAF Portfolio meet Stage 3 certification levels.
3.4.2 Regulatory Restrictions for Aging Aircraft
During past years, several airline accidents have focused attention on the
issue of the structural integrity of aging airliners. Engineering studies have
long predicted that
30
increased age and exposure to various environmental factors coupled with ever
accumulating landing/takeoff cycles eventually result in metal fatigue that can
weaken airframe structures. Experience with aircraft such as B707s, DC8s, B737s
and B747s has shown that constant surveillance is required to combat the
effects of age, pressurization cycles, atmospheric conditions and intensive
utilization. Indeed many Airworthiness Directives (ADs) and Service Bulletins
(SBs) have been issued by the FAA and aircraft manufacturers for inspection and
repair of structural components.
During 1989, the FAA issued reports on the findings of several industry task
forces which recommended mandatory implementation of Service Bulletins
concerning fatigue related problems. Subsequently, these recommendations have
been adopted in the form of Airworthiness Directives. The original Service
Bulletins recommended inspection of an area where the failure is predicted to
occur and require a repair or modification only when the crack actually
appears. The industry groups recommended that airlines terminate these
inspections at some point in the airplane's life by modifying the airplane in
the affected area.
The impact of these so called "aging aircraft" ADs varied from aircraft to
aircraft depending on production line number and previous voluntary
implementation of some of the Service Bulletins. Some of the SBs have calendar
limits and others are flight hour or cycle controlled. For the most part these
have been routinely incorporated into airline maintenance programs and, while
the cost of terminating a pending AD should certainly be recognized in
appraising a specific aircraft, the cost of the ADs no longer has any impact on
any entire fleet or class of aircraft.
More recently, accidents involving a TWA B747 and a Swissair MD11 have resulted
in ADs which have received much public attention requiring inspection of wiring
and fuel tanks. Similarly, an on-going FAA evaluation has resulted in payload
restrictions on some B727 freighters that were converted from passenger
aircraft.
31
Again, BK Associates believes that, while these are considered in appraising a
specific aircraft, they are not reason to decrease values, for example, of all
B747s and MD11s.
The values in Figure 2-1 assume all applicable ADs have been complied with.
3.5 Aircraft Sales Data
As noted in the introduction to this section, price data from actual aircraft
sales are an essential ingredient in the appraisal process. Recent sales
document current market values but the data also contribute to the development
of forecast base values from historic data. This process is discussed below.
3.5.1 Recent Sales Data
The experience of the airlines in realization from sales of used aircraft
influences the market to a lesser extent than the other factors, but it is
still a factor to be considered. The most recent sale price "sets" the market
if all other factors are equal. Regardless of the demand, availability,
suitability, and potential operating economics of a particular aircraft, few
buyers would be willing to pay a substantially higher price than was paid for
the most recent similar aircraft sold. Similarly, sellers are not willing to
accept a price that is significantly lower than the price of recent
transactions unless they are under pressure to sell.
While the above is still true, the problem in the current market has been to
identify recent sales and understand the circumstances surrounding the
transaction. There have been few recent sales of used aircraft and fewer still
for which the price was divulged by any of the participants in the transaction.
Furthermore, many sales have been under distress conditions and the price may
not be representative of the fair market value.
32
BK Associates tracks aircraft sales and maintains a database on the prices paid
in aircraft transactions. The transactions included are largely based on
airline Form 41 reports to the U.S. Department of Transportation (DOT).
Unfortunately, most U.S. airlines have withheld their reports since the Fourth
Quarter of 1992 but, even in this group, there have been few transactions
except for new aircraft deliveries. Other reports published in aviation
periodicals regarding non-U.S. transactions are also included.
Actual transaction prices for sales of relevant aircraft during the past one to
one and one-half years are reported in Figure 3-8. These were extracted from
the BK Associates database.
Some of the reports now contain reported "Stipulated Loss Values", "Security
Agreement Values" or "loan collateral values". These are identified in Figure
3-8 by appropriate abbreviations in the remarks column like "S.L.V.". In the
absence of other data, these reports are of some value but it must be
recognized that the actual sale price or value of the aircraft is likely to be
higher than the security agreement value or loan value. However, the actual
value is often lower than the stipulated loss value. Further, some reliable
sources identify some transaction prices even though they do not identify the
parties or the date of the transaction. Even though these data are incomplete
they are useful and are included in Figure 3-8.
In the absence of recent sales, appraised values must often be determined by
alternative methodologies. One approach that is especially reliable for nearly
new aircraft is to determine the new price, or replacement cost, of the
aircraft and subtract from it an allowance for the estimated hours and cycles
accumulated to date. While this approach is good for aircraft up to three years
old, extending it to five or six-year old aircraft gives at least one alternate
estimate when there have been no recent sales.
33
Figure 3-8
34
Figure 3-8 (Cont'd.)
35
Another approach is to determine the aircraft's current value by assessing the
affect of market changes since the last time the aircraft was appraised or
since the last time valid recent sales data were available.
Appraisers have traditionally based future value forecasts on models developed
from comparison to historic sales data modified to reflect the impact of
expected market conditions. This now offers still another approach to current
values. Based upon a very large sample of historic sales data we know how much
an aircraft should be worth as a percentage of its original cost in an average
market, balanced over the years by both strong and weak market conditions.
Using this as a starting estimate of what the value "should be", one can adjust
it to reflect current market conditions.
Figure 3-9 presents data on historic sales prices of all jet aircraft models as
a percentage of the new price and also the high/low range under all market
conditions. While not shown here, we have developed similar relationships for
wide-bodies only, and narrow-bodies only.
Figure 3-9
[GRAPHIC OMITTED]
36
4. SPECIFIC AIRCRAFT MODEL DISCUSSION
**********************************************
This section of the report presents a very brief narrative description of each
aircraft type included in the MSAF Portfolio. All data are from published
industry sources including the aircraft manufacturers. Statistical data are as
of October 1999.
4.1 Airbus
4.1.1 A300-600R
Airbus Industrie was established in 1970 by a consortium of European
manufacturers comprised of Aerospatiale of France; Deutsche Airbus of Germany;
British Aerospace of England and CASA of Spain. This partnership was
established expressly to develop large commercial transport aircraft and their
first product was the A300B1. The most recent variant is designated the
A300-600R, an extended range aircraft first certified in 1988. Today there are
231 A300-600s in service - including main deck freighters - plus 32 additional
units scheduled for delivery through the year 2000. There are 34 operators
worldwide and American Airlines is the largest single passenger operator with a
current fleet of 35 A300-600R aircraft, and FedEx has 35 freighters.
4.1.2 A310-300
The A310-300 was certified in 1985 and one of a series of variants to the
earlier A300 series. The A310 has a shorter fuselage and a two-man "glass"
cockpit. The A310-300 fleet size currently stands at 142 units plus six on
order for future delivery into 2003. There are 17 A310-300 operators worldwide
with Singapore Airlines having the largest fleet at 17 units.
37
4.1.3 A320-200/A321-100
The A320 was the first narrow-body produced by Airbus it employed a fly-by-wire
system with side-stick cockpit controls. A slightly larger variant, the A321,
was certified in 1993. The A321 is 14 feet longer and employs stronger landing
gear and engines. Currently there are 758 A320s in service with 92 operators.
The largest operators are U.S. carriers, Northwest Airlines with 70 and United
Airlines with 53. Future scheduled deliveries stand at 432 units. The A321
fleet is somewhat smaller at 141 units with 27 operators plus 126 firm orders
for future deliveries into 2007.
4.1.4 A330-300/A340-300
The A330-300 is a medium-/long-range wide-body developed by Airbus in concert
with the four-engined variant - the A340. These models are nearly identical
except for engines. Currently there are 75 A330-300s in operation with 11
operators worldwide plus 60 units on firm order for future delivery extending
to 2005. The A340-300 fleet stands at 134 units and 22 operators. Firm orders
of the A340-300 are 59 units extending into 2005. These statistics are
exclusive of the A330-200 and A340-200 variants.
4.2 Boeing
4.2.1 B737-300/-400/-500
The Boeing 737 series has been in airline revenue service for more than 30
years. The original aircraft, a B737-100, first flew in 1967. The
- -300/-400/-500 models incorporate advanced technology features in design and
construction. The B737-300 entered revenue service in 1984 and introduced the
CFM International CFM56 series engines. Today there are 1,046 B737-300s in
service with 97 operators worldwide plus seven on firm order scheduled for
deliveries only into 2001 as these -300/-400/-500 variants are being displaced
on the order books by the B737-600/-700/-800s. The B737-400 was certified in
38
1988. It is 120 inches longer than the -300 and is also equipped with the CFM56
series engines. Currently there are 476 in service and four on firm order with
60 operators worldwide. USAirways is the largest operator with 54 aircraft
followed by Alaska Airlines with 40 aircraft. A shorter version, the B737-500,
has a smaller population at 384 units in service with 40 operators. Continental
with 67 units and United Airlines with 57 units are the dominant B737-500
operators. There are no outstanding orders for future deliveries.
4.2.2 B747-300/-400
The original wide-body aircraft, Boeing's B747-100 entered service in 1969, and
since then a number of variants have been developed. The B747-300 is noticeably
different from any earlier B747 variants by its extended upper deck (EUD). The
EUD was originally available as a retrofit for existing B747-100 and -200
aircraft and was subsequently produced new by the manufacturer. The B747-300
was viewed by the industry as a "bridge" model between the earliest B747s and
the current offering by Boeing - the B747-400. In addition to advancements in
engine power, payload, range and design and manufacture technology, the
noticeable visual difference between the earlier models and the new standard
- -400 model is the extended upper deck which offers a higher seating capacity.
Currently there are 73 B747-300s in service with 23 operators worldwide. This
model is no longer in production. B747-400 fleet size stands at 405 plus 91
freighter-capable units with 63 operators. British Airways with 57 and United
Airlines with 43 are the significant B747-400 operators. The firm order book
stands at 73 aircraft including freighters with delivery scheduled into 2007.
4.2.3 B757-200
During the developmental stage, the B757-200 was considered the logical
replacement for the highly successful B727. Based on its higher fuel
efficiency, it would render the B727 uneconomical in a high fuel cost
environment. However, fuel costs have yet to reach the
39
levels expected at the time of the B757 conception. Nonetheless, the B757 has
been eagerly accepted into the narrow-body market. It was certificated in 1982
and today there are 862 in service with 56 operators, including 81 freighters
plus 72 on firm order with deliveries scheduled through 2005.
4.2.4 B767-200ER/-300ER
Boeing conceived the B767 to serve the gap between its B727/B757 narrow-body
product and the B747 wide-body. Certification of the B767 was achieved in 1982
(B767-200). Since that time, several variants were developed including the
- -300, a stretched version of the earlier B767-200. The -300 is 21 feet longer
offering greater seating capacity and with its higher gross weight - a greater
range than the -200. The -300 was certificated in 1987. The -200ER/-300ER with
higher gross weight than the base models are "extended range" variants.
Currently there are 97 B767-200ER aircraft in service plus 10 on order with 23
operators, additionally 395 -300ERs are in service and 30 on order with 59
operators. American is the largest -200ER operators with 17 units while Delta
and American operate 51 and 49 -300ERs, respectively.
4.2.5 MD82/MD83
The MD80 series was introduced by McDonnell Douglas in 1979. There are five
derivatives of the MD80 including - MD81, MD82, MD83, MD87 and MD88 totaling
approximately 1,066 units in service today. The MD82 is considered the standard
model as it accounts for 55 percent of the fleet total. The MD82 with JT8D-217
engines replaced the earliest model - the MD81 by offering performance
improvements. MD83s offered yet higher thrust JT8D-217C or optional -219
engines and increased fuel capacity and operational range. The MD87 is the only
one of the five models with a short fuselage with an approximate capacity of
130 seats. There are 28 operators of the MD82 and 27 operators worldwide of the
MD83 fleet. American Airlines is the largest single MD82
40
operator with 230 units, while Trans World Airlines is the largest MD83
operator with 52 units.
4.3 Fokker
4.3.1 F50/F70
The F50 was a follow-on design of the Fokker F27 aircraft. The F50 is a
twin-engine turboprop aircraft with typical seating for 50 passengers.
Certification was achieved in 1987 and today there are 181 units in service
with 31 operators. The largest fleet operator is SAS with 20 F50s. The F70 is
powered by twin Rolls-Royce Tay engines with seating for approximately 70
passengers. Certified in 1994, today there are 43 F70s in service with nine
operators. It is important to note that both models are out of production and
the manufacturer - Fokker Aviation - has closed its doors.
41
5. VALUE METHODOLOGY
******************************
The methodology used by BK Associates, Inc. in reaching the conclusions
presented in this report is consistent with aviation industry standards as well
as with appraisal industry practices such as those recommended by the American
Society of Appraisers (ASA) and the Principles of Appraisal Practice of the
International Society of Transport Aircraft Trading (ISTAT).
Different types of values may be presented in this report. Each type is defined
below and the methodology used in determining values is described.
5.1 Definitions
The following definitions are reproduced verbatim from the ISTAT appraiser's
handbook. While BK Associates complies with the substance of the ISTAT
definitions, where there are some differences in interpretation or a need for
further clarification, our comments are added after the definition.
Base Value is the Appraiser's opinion of the underlying economic value of an
aircraft in an open, unrestricted, stable market environment with a reasonable
balance of supply and demand, and assumes full consideration of its "highest
and best use". An aircraft's Base Value is founded in the historical trend of
values and in the projection of value trends and presumes an arm's length, cash
transaction between willing, able and knowledgeable parties, acting prudently,
with an absence of duress and with a reasonable period of time available for
marketing.
BK Associates does not normally provide opinions on Base Values since they
refer to a hypothetical market condition and may be misleading when compared to
actual values.
42
They would normally be used only in analyses of historical values or future
values where the assumptions relating to a hypothetical market condition are
more appropriate.
Market Value or Fair Market Value (or Current Market Value or Current Fair
Market Value if the value pertains to the time of the analysis) is the
Appraiser's opinion of the most likely trading price that may be generated for
an aircraft under the market circumstances that are perceived to exist at the
time in question. Market Value assumes that the aircraft is valued for its
highest, best use, that the parties to the hypothetical sale transaction are
willing, able, prudent and knowledgeable, and under no unusual pressure for a
prompt sale, and that the transaction would be negotiated in an open and
unrestricted market on an arm's length basis, for cash equivalent
consideration, and given an adequate amount of time for effective exposure to
prospective buyers.
BK Associates further believes that the "adequate amount of time for effective
exposure" is 12 to 18 months.
Distress Value is the Appraiser's opinion of the price at which an aircraft
could be sold under abnormal conditions, such as an artificially limited
marketing time period, the perception of the seller being under duress to sell,
an auction, a liquidation, commercial restrictions, legal complications, or
other such factors that significantly reduce the bargaining leverage of the
seller and give the buyer a significant advantage that can translate into
heavily discounted actual trading prices. Apart from the fact that the seller
is uncommonly motivated, the parties to the transaction are otherwise assumed
to be willing, able, prudent and knowledgeable, negotiating at arm's length,
normally under the market conditions that are perceived to exist at the time,
not an idealized balanced market.
BK Associates normally assumes that the sale must be completed in six months or
less for the Distress Value to apply.
43
Securitized Value or Lease-Encumbered Value is the Appraiser's opinion of the
value of an aircraft, under lease, given a specified lease payment stream
(rents and term), and estimated future residual value at lease termination, and
an appropriate discount rate.
BK Associates prefers the term "Lease-Encumbered Value" and does not normally
use "Securitized Value". We sometimes refer to the Lease-Encumbered Value as
the price an investor should be willing to pay for the aircraft given the
potential return from the lease payments and residual value.
5.2 Current Fair Market Value Assumptions
Consistent with, or in addition to, the definitions above, in determining
current fair market values for used aircraft or future values of a new
aircraft, BK Associates applies the following assumptions:
o The aircraft has half-time remaining to its next major overhaul or
scheduled shop visit on its airframe, engines, landing gear, and APU. If
the airframe is on a progressive maintenance system this, in effect, keeps
it always at half-time.
o It is under a civil aviation authority-approved airline maintenance
program of international standards of airworthiness, with all
Airworthiness Directives, mandatory modifications and applicable Service
Bulletins currently to industry standard.
o The specifications of the aircraft are the standard, or most common, for
that model in terms of gross weight, fuel capacity and engine model.
o The interior is in a standard configuration for its specific type, with
the buyer-furnished equipment and options of the types and models
generally accepted and utilized in the industry.
44
o It is in current flight operations.
o The aircraft is sold for cash without seller financing.
Adjustments are made to the value of a specific appraised aircraft to account
for variations from the assumptions stated above for a standard aircraft, as
well as for date of delivery, total hours and cycles and ratio of hours to
cycles, increased weight or fuel capacity capability, engine model and high
density configurations.
Values determined according to the above assumptions are often referred to as
"half-time" values as in the "half-time current fair market value". Values that
include adjustments for deviations from half-time for the current maintenance
status are referred to as "adjusted values" or "maintenance adjusted values".
The purpose of the adjustment for deviation from half-time on major maintenance
items is to recognize the cost of a major maintenance expense which may be
imminent for the buyer or which may have recently been absorbed by the seller.
In the case of a sale/leaseback where the operator of the aircraft does not
change and he continues to be responsible for maintaining the aircraft, recent
major maintenance expenses or impending expenses are usually not relevant to
the current fair market value. Only those conditions that result in a
maintenance expense or saving at the time the aircraft is returned to the
lessor are relevant and these usually have an impact only on the residual
values expectation. In these cases it is often concluded that the half-time
value is the current fair market value.
Changes in the aforementioned parameters and assumptions, as well as
availability of long-term financing by the seller, can easily increase or
decrease the market price by 25 percent or more. Compliance with modifications
and high cost inspections can also affect price and marketability. Aircraft
with higher approved operating weights or the eligibility to be certified for
such increases will bring premiums when specific operations requiring
45
such capabilities are to be the purpose for the acquisition of any given used
airplane. Sales of aircraft under distress conditions will often decrease the
market price and in the case of a "fire sale" due to a bankruptcy, still lower
values would apply, often as much as 50 percent below the probable value
defined above.
Aircraft that have been out of service for prolonged periods, or are not
currently certified as airworthy, usually incur lower market and appraised
values. Similar penalties will also apply to aircraft which have
disproportionately high cycle-to-hour ratios relative to the average achieved
by the industry in operating the specific type of aircraft.
5.3 Current Value Methodology
One of three methods is employed by BK Associates in determining the current
value of an aircraft:
1) Using industry data to ascertain the prices realized in recent sales of
comparable models. This is the most common method employed in aircraft
appraisals.
2) Replacement cost method. This approach is frequently employed when there
have been no recent comparable sales.
3) Rate of return to an investor. Determines how much an investor should pay
for the aircraft to get an acceptable return by taking into account the
lease payments and residual value of the aircraft at the end of the lease.
This method results in a "Lease-Encumbered Value".
The foregoing methods are discussed more fully in the following subsections.
46
5.3.1 Comparison With Recent Sales Method
The current fair market value of the aircraft is based upon our familiarity
with the aircraft type, its earnings potential in commercial service, our
knowledge of its capabilities and the uses to which it will be put throughout
the world, our knowledge of the marketing of used aircraft and the factors
affecting the fair market value thereof, and also is generally based on a
knowledge of the asking, offered and transaction prices for similar,
competitive, and alternative equipment as well as transactions and negotiations
involving basically identical aircraft, acquired from BK Associates' experience
in keeping track of the market and transactions concluded. These realizations
reflect supply and demand in the marketplace at the time of the sale and must
be adjusted for existing conditions at the time of the appraisal. However, this
adjustment is normally minor, as the comparable sales against which the
appraised aircraft is being compared usually have occurred recently. In the
absence of recent sales, the current value is often determined by assessing the
perceived impact of market factors on a particular aircraft model since the
last time there were sufficient sales to document the value.
5.3.2 Replacement Cost Method
Where there have been no comparable sales, a value can be determined by
comparing the direct operating costs (DOC) of the appraised aircraft with that
of a new technology replacement model. The usually lower DOC of the new design
is then added to its purchase price and finance charges over a typical loan
period to arrive at a total cost per seat-mile which usually is much higher
than the DOC alone of the appraised aircraft. This cash margin is the maximum
an airline can pay for the used aircraft and still receive a satisfactory rate
of return.
The principal assumptions employed in arriving at this amount are similar load
factors and revenue per seat-mile for both types. Other assumptions are the
number of seats, average speed and hours flown per month, so that the
differential between the two aircraft
47
costs per available seat-mile can be converted into the maximum monthly loan
repayments to equal the cash margin.
A variation in this approach that is sometimes used when the DOC parameters
cannot be compared accurately, is to relate the estimated remaining useful life
of the appraised aircraft to the current cost of a comparable replacement
aircraft. Thus, if it is concluded that the appraised aircraft is 50 percent of
the way through its probable life and a replacement aircraft costs $50 million,
the value of the appraised aircraft is estimated to be $25 million.
Neither of these replacement cost methods takes into account the effect of
supply and demand in the current marketplace and the appraiser has to make a
subjective adjustment for these conditions in order to arrive at an accurate
value.
5.3.3 Lease-Encumbered Value Method
This method uses the present value of the rental stream and forecast of the
residual value of the aircraft at the end of the lease term to determine what
an investor is willing to pay for a desired internal rate of return (IRR)
before taxes. In the current market 8.5 percent, or better, is usually
considered reasonable where the airline is a good credit risk. This lease
encumbered valuation can produce current market values greater or lesser than
the fair market values, depending upon the rental rate and the appraiser's
opinion regarding future values of the appraised aircraft.
48
6. QUALIFICATIONS OF BK ASSOCIATES, INC.
*************************************************
BK Associates was established in 1984 by William H. Bath and John F. Keitz to
provide professional consulting services in virtually every facet of aviation.
Although we specialize in aircraft appraisals and related services, the
aviation experience of our staff and associates is varied and includes such
disciplines as aircraft performance analysis, air traffic control, maintenance
facility design, audits of corporate flight operations, airline schedule
analysis, noise studies, transportation economics, and management and
organization planning. We continue to maintain the resources and database to
provide these services.
BK Associates regularly provides professional services to airlines; airframe,
engine and component manufacturers; legal and financial institutions;
industrial firms; and governments. The range of services include:
o Aircraft Appraisals and Residual Value Forecasts
o Aircraft Inspections
o Maintenance Audits for Compliance with Lease Provisions
o Appraisals of Airships, Engines, Simulators, Spare Parts & Ground Equipment
o Aircraft Supply & Demand Studies
o Market Studies
o Expert Witness Testimony
All BK Associates aircraft appraisers are certified by the International
Society of Transport Aircraft Trading (ISTAT). ISTAT is a non-profit society
whose members have common interests in the manufacture, purchase, brokerage,
leasing, maintenance and appraisal of transport aircraft. International in
structure, it is self-supporting and unaffiliated. Within ISTAT is a core group
of professional aircraft appraisers who work
49
cooperatively for the elevation of the appraisal profession within the world
aviation community.
Each ISTAT member, who has satisfactorily demonstrated that he is qualified to
appraise aircraft, has been granted the right to use one of the professional
designations established by ISTAT. Certification by the Society is based on
written examinations, submission of representative appraisal reports, full-time
valuation experience, personal background check and participation in the
Society's program of on-going education.
Ethical practices and conduct required of the appraisers accredited by the
Society are clearly defined by ISTAT.
BK Associates has developed a unique inventory of resources to assist in
providing its services. When the company was founded, the founders acquired the
assets of their former employer, PRC Speas (formerly R. Dixon Speas Associates,
Inc.). This included an extensive technical library with aircraft
specifications and performance data for nearly all aircraft manufactured since
the 1950s. The library includes airline and airport traffic data from the 1950s
onward, copies of annual government industry and manufacturer's forecasts,
entire historic collections of significant aviation publications, such as,
Aviation Daily, Aviation Week & Space Technology and Jane's All the Worlds
Aircraft plus complete reference sets of U.S. Federal Air Regulations, Type
Certificate Data Sheets and Airworthiness Directives.
Our database of aircraft sales transactions includes all those reported on U.S.
Department of Transportation Form 41 reports by U.S. Airlines since 1971. In
addition, while the ISTAT ethics code forbids us to divulge the details, we are
aware of the transaction prices of many more sales because of appraisals we
have conducted. These historic data contribute to the statistical bases of
aircraft value models and future value forecasts.
50
Since 1984, BK Associates has completed over 4,000 specific appraisal
assignments which have included over 20,000 aircraft. (Some aircraft have been
appraised more than once.) We have appraised all airline transport types and
models of Airbus, Boeing, McDonnell Douglas, Lockheed, British Aerospace,
Fokker, ATR, Convair, Fairchild, Embraer, deHavilland of Canada, Dornier,
Canadair, Saab and Short Brothers. We have appraised most business jet models
of Gulfstream, Canadair, Falcon Jet, Cessna and British Aerospace.
Mr. John F. Keitz is President of BK Associates. Mr. Keitz has 35 years of
experience in aviation. He held various positions in PRC Speas during 19 years
with the firm including Manager of the Computer Services Division and Manager
of the Aviation Consulting Division. In addition to aircraft appraisals, his
consulting activities have consisted primarily of analyses and forecasts of the
future demand for aircraft and other aviation products, aircraft performance
comparisons, and fleet plans.
Dick Britton, Vice President, joined BK Associates in 1992 after 25 years in
various technical positions with Pan American ending as Assistant Director
Aircraft Sales and Leasing. He was responsible for all Pan Am leased aircraft
transactions and implemented the return of all aircraft to lessors when Pan Am
ceased operations.
Mr. Keitz has been certified as a Senior Aircraft Appraiser by the
International Society of Transport Aircraft Trading and abides by the
"Principles of Appraisal Practice and Code of Ethics" of the Society. ISTAT has
established the principles to improve aircraft appraisal standards and
techniques; encourage sound professional practices and ethical conduct. Mr.
Britton is also an ISTAT certified appraiser.
William H. Bath retired as President of BK Associates, Inc. on December 31,
1996. He held various maintenance, engineering and aircraft sales positions at
Pan American World Airways before he joined PRC Speas in 1978 as its Director
of Technical Services.
51
CURRENT BASE VALUES
OF AIRCRAFT IN THE
MORGAN STANLEY MSAF PORTFOLIO
Prepared for: Prepared by:
Morgan Stanley Aircraft Finance BK Associates, Inc.
London, England Manhasset, New York
January 28, 2000
52
TABLE OF CONTENTS
************************
Page
Number
------
1. INTRODUCTION....................................................... 1
2. CONCLUSIONS........................................................ 2
3. DISCUSSION OF MARKET............................................... 6
3.1 Current Demand and Availability............................... 7
3.2 Projected Supply and Demand................................... 12
3.2.1 Passenger Traffic...................................... 13
3.2.2 Fleet Size and Composition............................. 14
3.2.3 Commuter Traffic and Commuter Fleet.................... 18
3.2.4 Future Balance Between Demand and Supply............... 23
3.3 Suitability of the Aircraft................................... 24
3.4 Regulatory Factors............................................ 29
3.4.1 Noise Regulations...................................... 29
3.4.2 Regulatory Restrictions for Aging Aircraft............. 29
3.5 Aircraft Sales Data........................................... 31
3.5.1 Recent Sales Data...................................... 31
4. SPECIFIC AIRCRAFT MODEL DISCUSSION................................. 36
4.1 Airbus........................................................ 36
4.1.1 A300-600R.............................................. 36
4.1.2 A310-300............................................... 36
4.1.3 A320-200/A321-100...................................... 37
4.1.4 A330-300/A340-300...................................... 37
53
TABLE OF CONTENTS (Cont'd.)
Page
Number
------
4.2 Boeing........................................................ 37
4.2.1 B737-300/-400/-500..................................... 37
4.2.2 B747-300/-400.......................................... 38
4.2.3 B757-200............................................... 38
4.2.4 B767-200ER/-300ER...................................... 39
4.2.5 MD82/MD83.............................................. 39
4.3 Fokker........................................................ 40
4.3.1 F50/F70................................................ 40
5. VALUE METHODOLOGY.................................................. 41
5.1 Definitions.................................................. 43
5.2 Current Fair Market Value Assumptions........................ 43
5.3 Current Value Methodology.................................... 45
5.3.1 Comparison with Recent Sales Method................... 46
5.3.2 Replacement Cost Method............................... 46
5.3.3 Lease-Encumbered Value Method......................... 47
6. QUALIFICATIONS OF BK ASSOCIATES, INC.............................. 48