ISSUE 67

2nd Quarter 2020

The latest commentary and analysis from Ascend by Cirium

Clear air
turbulence
In this issue
Covid-19: When will demand return?
Flying through a storm: gauging value behaviour
How will Chinese lessors hold up in the crisis?
From dawn to dusk of the 777-300ER lifecycle
IT’S A LOGISTICAL
DAYDREAM
K N O W I N G M O R E P U T S Y O U A B O V E T H E C L O U D S.
I N T R O D U C I N G C I R I U M. B R I N G I N G TO G E T H E R P OW E R F U L DATA
A N D A N A LY T I C S T O K E E P T H E W O R L D I N M O T I O N .

A s m a r t e r wa y.

CIRIUM.COM

Welcome to ViewPoint 67
Introduction
Rob Morris, global head of consultancy,
introduces the latest edition of Viewpoint
rob.morris@cirium.com
What a difference a couple of months makes! When I wrote the introduction of our last Viewpoint back in
February, we were speaking of concerns about the impact of what we now know as Covid-19 on markets
in China.
As we travelled to Austin for the ISTAT Americas
event, it was becoming increasingly clear that this
was a global issue and of course on 11 March, the
World Health Organisation formally declared it a
global pandemic. As a consequence, that event in
Austin is highly likely to be the last time we can
meet in person for a significant length of time.
Indeed, I am writing this from my desk at home in
Hertfordshire in the UK, where the unusually blue
skies above us are also unusually empty of aircraft
save for the odd high-altitude contrail of some cargo
aircraft heading for North America. Given that I live
under the typical departure path for London-Luton,
the UK’s fifth busiest airport, this aptly illustrates
the unprecedented situation we find ourselves in.
With all of this uncertainty, there are a couple of key
questions which we are being asked multiple times
daily. When will traffic recovery begin and when
might we expect to see volume back to 2019 levels?
And what will happen to aircraft values and lease
rates in the near, medium and long term? To some
extent we seek to answer these and more in this issue.
For traffic recovery, the absolutely honest answer is
that none of us can know with any level of certainty.
To use a metaphor, the walls have come tumbling
cirium.com
2nd Quarter 2020 Issue 67
down and the dust has yet to settle. As it settles,
we can start to inspect our walls and work out if
the foundations are still robust (for which we mean
the fundamentals for traffic demand). Then we will
start to rebuild the walls and as we understand how
demand is recovering, we can conclude how high
those walls need to be. While waiting for the dust
to settle, we can start to work through potential
recovery scenarios to work out our future height.
Our senior consultant Richard Evans writes about
our scenario analysis and explains the potential
consequences of this on future aircraft demand and
supply. This is very much a work in progress and we
will be developing and reporting further thoughts as
we move through the next weeks and months.
For values and lease rates, George Dimitroff sets
out our thoughts and approach to calibrating these
during such uncertain times. As you will know,
our entire team of 30 consultants is constantly and
obsessively researching transaction data to calibrate
our value and lease rate opinion. But as demand
has ground to a halt, such detail becomes even
harder to source than ever. However, our Values
Review Board, which usually meets every two
weeks, has now moved to a weekly schedule and
we are constantly reviewing all types as necessary.
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 2nd Quarter 2020 Issue 67
George’s article sets out the current approach and
also reports changes we have made over the past
few weeks. If you need more detail on any of these,
please contact us for our latest editions of Inside
Track on Values which has also moved to a weekly
publication schedule for the time being.
Within these uncertain times, we do have more
data than ever within the Cirium Core to help
us understand the trajectory of the pandemic.
Schedules data tells us that global capacity is
down 80% on a daily basis compared to 2019, for
the week of 20 April. There is a ray of light in the
China domestic market where it is down only 33%,
and where by the end of May it is up 5% year-on-
year. However, flight status data tells us that on
average, more than 20% of scheduled flights (even
from the revised schedule) were cancelled in the
prior week in April. The data further tells us that
only 4,076 single-aisle and 599 twin-aisle aircraft
were operating scheduled passenger flights on
Friday, 19 April, compared to 13,929 and 3,993
respectively on Friday, 3 January. It also tells us
that single-aisle aircraft operated on average 44%
less daily hours on 19 April, while twin-aisles flew
33% less.
Fleet data tells the story in a slightly different way,
with 64% of the passenger single-aisle fleet (some
10,840 aircraft) and 72% of the twin-aisle fleet
4 Ascend by Cirium
(some 3,650 aircraft) parked as of 20 April. To finish
on a personal note, I pass my 30th anniversary as an
aviation analyst in May 2020. The fleet in service
today is around 7,580 aircraft. The last time it was
that small was June 1991, almost the same 30 years
ago. So in just two months, all of the growth seen
over almost my entire commercial aviation career
to date has been wiped out. What a two months it
has been!
That’s enough bad news for now. The data I have
just cited indicates that the airline shutdown phase
globally seems to be at the end. Many regions are
moving into hibernation, but observation of the
China market provides hope that the hibernation
phase may be relatively short. Then we can move
into the recovery phase and as per Richard’s article,
the question then becomes how quickly that phase
plays out before we move into consolidation of that
recovery. In the brave new world, we are restricted
to reporting our thoughts on all of this via Webex
and other remote media. We’ll be running numerous
events over the next few months, so keep watch for
details or feel free to contact any of our team with
specific questions at any time.
In the meantime, from our team we send our best
wishes and thoughts to all our friends, their families
and colleagues. As we have learnt to say over the
past few weeks – STAY HOME, STAY SAFE.
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 2nd Quarter 2020 Issue 67

Covid-19: When will

demand return?
Richard Evans, senior consultant, examines the impact of
the global pandemic on fleets and deliveries

richard.evans@cirium.com

At the time of writing (15 April), it is almost impossible to comprehend the magnitude of the impact of Covid-19
on the global airline and aerospace industries. International passenger travel has almost ceased, other than for
repatriation flights. Domestic demand is almost as badly affected, as the majority of nations impose lockdowns
on their populations. Where flights still occur, load factors of 5-15% have been widely quoted.

The economic impact is also huge, with industrial
production disrupted and many service industries
completely closed. Unemployment is rising sharply,
and forecasts for global GDP growth continue to be
cut. Recessions are expected in 2020 across most of
the world.
The lack of long-haul passenger flights has had a
positive impact on demand for main deck cargo
aircraft, with utilisation increasing. We are also
seeing examples of passenger aircraft being used
for dedicated freight services, using their belly-hold
capacity, or in some cases even loading cargo into
their passenger cabins. It is unclear if this “boom”
in air cargo will continue, given the disruption to
manufacturing across the globe.
At this point, traffic and capacity data are rapidly
obsolete. Nevertheless, the current crisis can be
contextualised with some key figures:
• February passenger traffic, measured in revenue
passenger kilometres (RPKs), for Chinese
airlines was down 85%.
• Global capacity in available seat kilometres
(ASKs) was down by 76% in early April.
• More than 60% of the world’s commercial jet
airliners, or over 15,700 passenger aircraft
including regional jets, were parked by the
second week in April. The previous peak in
2003 saw just 13% of the fleet parked.
• For those that remain in service, average daily
utilisation has fallen from 13h to 10h for twin-
aisles, and from 9h to 6h for single-aisles.
Utilisation only fell by 5% in the financial crisis
of 2008-2009.
• In March, IATA released a scenario (since
revised downwards) envisaging a 38% fall in
passenger traffic in 2020, with capacity down by
over 30%. This implied 2020 global traffic will
be lower on an annualised total than that seen
in 2012. In effect, the pandemic has resulted in
the loss of seven years of consolidated demand
in a single year.
The figure for Chinese traffic decline is similar
to that seen in the worst month of SARS in 2003.
However, this was a short-lived demand dislocation,
with 2003 global traffic actually increasing by 1%,
and falling by just 5% for Asia-Pacific airlines. Post-
SARS, passenger traffic returned to pre-crisis levels

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 2nd Quarter 2020 Issue 67

Impact of SARS on 2003 passenger traffic

RPKs (year-on-year change)
40%

20%

0%

-20%

-40%

-60%

-80%
Month 0 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12

Source: CAAC, IATA, AAPA (2003), Month 1 = March 2003 and January 2020

China (2003) Rest of Asia (2003) World (2003) World (2020)

around seven months later, in a V-shaped recovery,
with 2004 recording growth of 14%.
The current crisis is undoubtedly different in terms
of the depth and spread of demand impact. Airlines
continue to remove schedules in the short term,
with at least a three-month period of little or no
international traffic.
Looking ahead with any certainty is impossible, as it
depends wholly on the progress in combatting and
controlling the virus itself. In terms of the airline
industry, the future can be thought of in terms of
four stages:
1. Contraction/shutdown
2. Hibernation/stabilisation
3. Recovery/rebuild
4. Normalisation/return to growth
We are currently in the first stage, where each week
sees a greater impact on passenger traffic, schedules
and stored aircraft. Some airlines have already sought
bankruptcy protection, and many have ceased all
flights for a period of up to six weeks. Many airlines
will need government intervention to survive,
including, in some radical cases, nationalisation.
They will also obtain much-needed liquidity via
many different mechanisms, including sale-and-
leaseback of aircraft to operating lease companies.
At some point in the coming weeks, airline fleets
and schedules will stabilise at much lower levels
than seen at the start of 2020. Domestic markets
in countries less affected by Covid-19 may see
schedules “only” down by 40-60%, but it is likely
almost all international markets will see capacity
levelling out at some 70-90% below 2019 levels.
As an example, China’s domestic schedule for April
2020 is down 26% on 2019, but even within this

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 2nd Quarter 2020 Issue 67

Distribution of airline capacity (ASKs) across regions – April 2020 vs 2019

Share of April 2019 ASKs
100% Africa
Middle East
Others S&C Am/Caribbean Others
90% Intra North America
Canada
Mexico Europe-Africa
80% Australia
Indonesia North-S&C America
Japan
Brazil
70% Russia Europe-Middle East
India Intra Europe

60%
Transpacific

China
50%
Asia-Middle East

40%

30% Europe-Asia

Intra Asia
20% United States

Transatlantic
10%

0%
Domestic Intra-regional Intercontinental
35% of ASKs 26% of ASKs 39% of ASKs
Source: Cirium Schedules data. Shading represents ASK change April 2020 vs April 2019 @ 6 April

>50% 25-50% less than 25% fall

there are still many cancellations. Actual flights
flown are down around 40% year-on-year. The
second chart shows the distribution of capacity in
April 2019. This shows that international markets
made up around 65% of the total. However, the
reduced schedule for April 2020 now has 60%
of capacity in domestic markets and the shading
reflects levels of change.
Further cuts to schedules in US domestic markets
are expected, such that around 90% of pre-crisis
capacity will be subject to cuts of 70-90%, probably
for several months. With lower load factors, this
implies a year-on-year traffic decline of around 80%
during April and May, and possibly longer.
The in-service fleet may not fall by quite as
much as capacity, given lower utilisations, and
a concentration on short-haul flying on essential
routes and domestic markets. Passenger load factors
will also be reduced in the hibernation/stabilisation
phase. Freighter aircraft will remain in service as
long as global trade does not fall precipitously.
Key questions in this phase include:
• Which aircraft classes or types will be most
impacted?
• Which airlines will be able to survive?
• What will happen to aircraft values?
We have seen huge falls in oil prices due to a lack of
demand. While this might point to airlines choosing
to continue to fly older, fully written-down aircraft,
that does not appear to be happening. For example, in
early April, 64% of Airbus A320ceos were in storage,
compared with 55% of A320neos. For passenger
twin-aisles, 77% of all A330s and Boeing 777-200s
were parked, compared with 60% of 787s and 63%
of A350s. Large, four-engined twin-aisles have seen
the worst impact, with 97% of A380s parked, 87%

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 2nd Quarter 2020 Issue 67

of passenger 747s and 80% of A340s. Data showed
70% of twin-aisles parked, compared to 50% of
single-aisles, reflecting the more severe capacity cuts
on longer-range and international services.
In terms of airlines, it is clear many can only survive
for a few months without cash and/or equity
injections. Airlines have been busy raising cash
from a number of sources, with government loan
guarantees, direct loans and even cash grants being
issued. In general, the larger airlines have been
those that have made the highest profit margins
in recent years, and are best-placed to weather the
coming months. Government-owned carriers are
also less vulnerable. However, there are several
hundred smaller, privately owned airlines, which
have few assets and weak balance sheets. It seems
inevitable that many of these are at risk of failing,
unless they can access government aid of some
form. These airlines often have the majority of their
fleets on lease, so the outcome of negotiations with
lessors over rent holidays or lease restructuring will
be vital to their continued survival.
Ascend by Cirium’s analysis on values and lease
rates is summarised in a separate article.
This hibernation/stabilisation phase is likely to
last several months at least. Nobody can presently
predict with any certainty how long this will be.
So, what can we monitor for any signs of recovery?
Passenger demand cannot recover until people
are allowed by their governments to travel. Even
when restrictions are relaxed, confidence in the
safety of travel needs to be restored. Businesses
and individuals must feel confident they will not
be trapped abroad by new quarantine and lockdown
rules. Travel insurance needs to be available once
again. All this can only follow on from success in
reducing the number of Covid-19 cases and deaths.

Scenario 1 quarterly RPK forecast to 2023

Quarterly RPKs (bn) Year-on-year change %
3,000 100%

2,700 80%

2,400 60%

2,100 40%

1,800 20%

1,500 0%

1,200 -20%

900 -40%

600 -60%

300 -80%

0 -100%
2019 2019 2019 2019 2020 2020 2020 2020 2021 2021 2021 2021 2022 2022 2022 2022 2023 2023 2023 2023
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Source: Ascend by Cirium analysis. Note: 2021 Q2 = 315% and 2021 Q3 = 150%

RPK (bn) RPK change relative to 2019 RPK change

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 2nd Quarter 2020 Issue 67

Scenarios 1, 2 & 3 annual RPK forecast to 2023

Annual RPKs (bn) Year-on-year change %
10,000 100%

9,000 80%

8,000 60%

7,000 40%

6,000 20%

5,000 0%

4,000 -20%

3,000 -40%

2,000 -60%

1,000 -80%

0 -100%
2019 2020 2021 2022 2023
Source: Ascend by Cirium analysis

RPK (bn) – S1 RPK (bn) – S2 RPK (bn) – S3 RPK change – S1 RPK change – S2 RPK change – S3

Key metrics are thus likely to be the rate of new
cases, and the number of days since the last new
case. When a country or territory judges that the
rate of new cases is sufficiently low to allow for
some relaxation of social distancing measures, non-
essential businesses may be able to recommence
operations, and domestic air service may expand in
response to recovery in demand. It seems clear that
domestic demand will recover before international
demand, as evidenced by China at present. In
another example, Papua New Guinea has not seen
a new case for 16 days at the time of writing, and
domestic flights recommenced on 6 April after a
two-week lockdown.
The case for re-establishing international capacity
is less clear. It is likely that bilateral agreement
between two countries that have both contained
Covid-19 will be needed, to the satisfaction of one
another. The test case will likely be when China
increases international flights beyond the one per
week per country per airline basis, and to which
countries? In this environment, direct point-to-
point routes may be more viable than connections
via a transit hub.
When recovery starts, it could thus be a slow
process, rather than a sharp V-shaped bounce
back. IATA outlined its March 2020 scenario as
a three-month lockdown, followed by a U-shaped
recovery, due to the global recession caused by
Covid-19 and the response to it. Business travel
will perhaps recover more quickly than leisure
travel, especially with disposable incomes
hit during the pandemic-induced recession.
However, even this requires corporate travel
policies to allow travel in the new environment.
Also, the disruption caused by Covid-19 may lead
to a reduction in the need to travel, with increased
use of remote working and videoconferencing,
which many have learned to use effectively in the
past few weeks.

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 2nd Quarter 2020 Issue 67

We have considered a slightly different scenario,
as shown in the third chart. If we assume Q1 2020
traffic fell by around 20%, followed by around 80%
in Q2, with a slow recovery over the remainder of
2020 (eg, 60% fall in Q3, 30% in Q4), this results in
a 2020 annual traffic decline of nearly 50%, similar
to IATA’s revised scenario released in mid-April.
Capacity will fall a little less, but is still likely to be
down by 35-40% over 2019.
We will likely see a numerically strong traffic
rebound in 2021, but in the scenario of a deep
recession in H2 2020, it will be unlikely to recover
to 2019 levels. As an example, if 2021 traffic was
down by 10% on 2019, this implies traffic growth of
around 75% in 2021, with Q3 2021’s RPKs equalling
those in Q3 2019.
one has traffic returning to 2019 levels by Q3 2021,
whereas scenario two has a more rapid recovery by
early 2021. However, the third scenario includes a
six-month “hibernation” phase, and only expects
2019 traffic levels to be regained by 2023. Questions
also exist about the ongoing growth rates from this
point. Do we see a return to the 5-6% per annum
growth typical of the last cycle, or a lower growth rate
caused by readjustments to ways of doing business
and attitudes to the risk of travel? Will certain airline
business models fare better than others in the post-
pandemic world? Airlines with lower cost bases may
be in a better position to take advantage of the upturn,
providing they have the balance sheets to survive the
hibernation phase. If hub transfer models take longer
to be re-established, then the largest aircraft and
regional jets would be hit harder.

Two other scenarios have been considered, and all
three are summarised in the fourth chart, in terms of
annual growth rates.
These three alternatives differ in terms of the
effective number of years of traffic “lost”. Scenario
Clearly, all three scenarios have an impact on
capacity requirements, and the number of new
aircraft deliveries. Put simply, scenario one would
imply that two years of new aircraft deliveries are
not required, all other assumptions being equal. In
reality, capacity will also be adjusted by increased

Potential retirement candidates under scenario 1

Class Type Build year range Number of aircraft

Narrowbody aircraft 737-300/400/500 1985-2000 380

757-200/300 1987-2005 337

MD-80/90 1985-1999 153

737 NG 1997-2001 745

A320 family 1989-2001 973

Total narrowbody 2,588

Widebody aircraft A340-300 1992-2008 72

A340-600 2001-2010 47

A330-200/300 1992-2003 176

747-400 1989-2005 118

767-200/300 1984-2004 298

777-200/200ER/300 1994-2002 284

Total widebody 995

Source – Cirium Fleets Analyzer, Ascend by Cirium analysis

10 Ascend by Cirium cirium.com


removals from service, potentially lower aircraft
productivity, and maybe the use of smaller aircraft.
With no adjustments to average aircraft productivity
and load factors as seen in 2019, scenario 1 implies
1,400 fewer in-service aircraft are required in 2021
than in 2019. This compares to a predicted increase
of around 2,800 aircraft, as per the 2019 Cirium
Fleet Forecast. Therefore, around 4,200 aircraft
would need to be parked, retired or have their
delivery postponed.
Airbus has already announced production rate cuts,
which, if sustained through 2021, imply around
500-600 aircraft will be delivered this year, followed
by perhaps 650 in 2021. Further production cuts
cannot be ruled out, however. Boeing cannot resume
737 Max production as soon as desired, but it does
have more than 400 aircraft already built that could
start to be delivered in H2 2020.
It is likely that 787 rates will be cut, perhaps to five
to seven aircraft per month. Deliveries of passenger
jets in 2020 could be anywhere from 200-400
aircraft perhaps. If Max production resumes in 2021
at around rate 15-20, Boeing might deliver 300-500
passenger aircraft.
These combined production figures, while much
lower than the 3,900 originally planned for 2020-
2021, still imply large numbers of aircraft will
be parked and/or permanently retired. Ascend’s
forecast anticipated 1,200 single-aisle and twin-
aisle passenger jets would be retired in 2020 and
2021. If combined deliveries across the two years
are now around 1,850 aircraft, then a total of
3,250 aircraft need to be retired in scenario 1 – an
increase of more than 2,000 compared to the 2019
Fleet Forecast. However, there are also nearly 400
737 Max aircraft that were grounded in 2019, which
will resume flying at some point. In conclusion, we
see a surplus of 2,450 aircraft, in addition to our
originally predicted figure of 1,200 retirements.
If we reference the passenger fleet in service at
the start of January 2020, removing 3,650 aircraft
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2nd Quarter 2020 Issue 67
out of the total in-service fleet of 20,150 aircraft
equates to removing all aircraft built before Q2
2002. Several types are already clearly vulnerable
to early retirement, as evidenced by airline
announcements to-date. These include out-of-
production twin-aisles, such as the 747-400, 767
and A340, as well as passenger 757s. Older A330s
and 777s are also vulnerable, and almost all the
remaining 737 Classics and MD-80s/90s will
disappear, with wide availability of mid-life 737
NGs and A320 family aircraft on the market. In two
to three years’ time, the in-service fleet is likely to
be much more homogenous than today, with an
even higher share accounted for by the A320ceo/
neo, 737 NG/Max, 777-300ER, 787, newer A330s
and the A350.
In reality, airlines are likely to see lower load
factors and lower average aircraft productivity
than in 2019, possibly due to smaller aircraft being
deployed, resulting in a smaller aircraft surplus, at
least in terms of units.
Scenario 2 has a smaller impact, where the markedly-
reduced deliveries in 2020 and 2021 could result
in a relatively small number of extra retirements.
However, this scenario needs a relatively aggressive
rebound in passenger traffic commencing in 2020
and sustained through 2021. The more severe
scenario 3 leads to a further 3,800 aircraft surplus
across 2021. This implies additional retirements
of more than 7,000 across 2020 and 2021. It is also
likely that production rates would have to stay at
low levels for at least three or four years.
At the time of writing, it is completely unclear how
the Covid-19 crisis will evolve over the next year, thus
these aviation scenarios can only be illustrative. The
value of these scenarios is that we can now monitor
traffic and capacity progress against them, and assess
the evolving surplus fleet position. Supply and
demand balance is a clear driver of aircraft values
and lease rates. We will be continually refining our
views and communicating with the market. More
bespoke analyses are, of course, available on request
from the Ascend by Cirium team.
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 2nd Quarter 2020 Issue 67

Flying through a storm:

gauging value behaviour
George Dimitroff, head of valuations, talks about our
approach to valuations during the current crisis, and looks
at potential declines in the coming months
george.dimitroff@cirium.com

The Covid-19 crisis has created an unprecedented disruption in global and regional aviation demand and the
recovery scenario remains highly uncertain. This is expected to have a fundamental impact on aircraft demand
and consequently on aircraft values and lease rates.

Following the shock events in 2001 and 2008,
reductions occurred incrementally in several steps
over 12 to 24 months, as declines in both trading
volume and pricing naturally followed decreases
in traffic and then aircraft demand. This is why we
cannot be expected to slash values by an extreme
amount overnight to reflect a scenario that could
in fact take until late 2021 or 2022 to fully reveal
itself; and with an ultimate magnitude that, frankly,
nobody can accurately predict today.
We commit to thoroughly monitor the market and
reflect movements in value as quickly and nimbly
as possible. We are proactively reaching out to
aircraft owners and traders for transactions and
their associated price datapoints, as well as to
better gauge trading conditions. However, we will
also be considering other non-transactional data,
including used aircraft availability, premature lease
returns, airline failures or restructuring, demand
for each type from airlines looking to grow their
fleets (if any), return to service of the 737 Max, OEM
production rates, and any other issues which may
affect supply. With these factors, we will be able to
quickly apply any required adjustments to Current
Market Values (CMV) and Lease Rates.
We have begun by making some reductions to
aircraft types where there was already evidence of
some weakness even as the crisis was just starting to
unfold. It is very important to note that when we go
into revising values, we are not doing so blindfolded,
nor are we making sweeping percentage reductions
across the board. Since the start of 2020, we have
already gathered 674 datapoints for commercial
aircraft and engines including 325 sale-related ones
and 282 lease-related ones. Out of the total, 126
datapoints were captured in March and April, so one
cannot say that there is no market activity – there is.
Our approach to Base Values
We have been asked numerous times whether we will
be making any impairments to our Base Values (BV)
as a result of the Covid-19 crisis, and the broad answer
is no, not purely because of the crisis. Even if there
is a two- to three-year dent on passenger demand
and traffic growth, it is still a short-term disruption
relative to the over 20 year nature of BV projections.
However, there may be impairments to specific
aircraft types due to factors that already existed
prior to Covid-19. Some of the popular twin-
aisle aircraft types are more susceptible to such
structural corrections, especially when they were
underperforming our Base Value expectations even
in the strong market conditions of 2015-2019. Types
where Market Values were 35% or more below Base
as of January 2020 are most likely to see impairment.
Estimating the fall: how low can values go?
While many of our clients understand and agree
with our methodology of incremental CMV

12 Ascend by Cirium cirium.com


reductions as the market evolves, they also need
to make critical decisions and assess risk based on
the ultimate bottom-of-the-market scenario that is
likely to transpire. The problem is that with so many
unknowns it is difficult to guess this. One can look at
the past two or even three downturns but then most
agree this one could be worse than any of them. Our
initial approach to this problem is to use the tools
we have at our disposal to better understand where
values stand and how low they can potentially go.
One of the most powerful tools we have is our
aircraft Asset Risk Ratings, which we have now been
producing for 10 years. These measure downside
volatility of Market Values below Base using a
mix of statistical analysis from past downturns
and our manual overrides of some of the outputs
based on our knowledge of the evolving industry
environment. The output from these ratings can
be used to calculate a Downside Value – similar to
a Soft Market Value but more granular, in that its
discount level below Base Value varies by aircraft
age and where appropriate, engine selection, and is
more empirically derived.
Potential decline between Q1 2020 CMV and 2020 Downside Value
for A320-200 (CFM -5B)
Potential decline from 31 March CMV to Downside Value
0%
-10%
-20%
-30%
-40%
-50%
-60%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Year of build
Difference between Downside Value and 31st March CMV
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2nd Quarter 2020 Issue 67
We calculated the difference between the 31 March
Market Value and the Downside Value for each
build year on several key aircraft types as a proxy
for the potential decline that they may experience
from peak to trough.
The A320 chart shows that for the most recent 20
vintages, the potential declines range from 23% to
almost 60%. In fact, if older vintages are included
back to 1995, the decline can be even greater in
percentage terms, but in absolute terms, it isn’t as
horrifying for low-value older aircraft. The fleet-
weighted average potential decline for this type
comes to 34%. Given that we made reductions of
5-19% to CMV this month, the model suggests there
could be another 25% (fleet-weighted average) to go
before we reach potential Downside Value.
It must be borne in mind that Market Values for the
Airbus A320, especially for older vintages, were
significantly above Base Value, due to an overheated
Part-Out market, so many of the initial value
reductions ate away at the premium of Market over
Base before they started to move further below Base.
Average decline
0%
-10%
-20%
-30%
-40%
-50%
-60%
Source: Ascend by Cirium Asset Risk Rating and analysis
Fleet-Weighted Average Decline
Ascend by Cirium 13
 2nd Quarter 2020 Issue 67
Potential decline between Q1 2020 CMV and 2020 Downside Value for key types
Aircraft Type
Airbus A320-200 (CFM -5B)
Airbus A320-200neo (P&W)
Boeing 737-800
Boeing 737 Max 8*
Airbus A350-900
Boeing 787-9 (GE)
* Note Market Values have declined by 10% in the past 12 months since the type was grounded and are already significantly below Base Value. The lack
of production for 2020 skews fleet-weighted results too.
SOURCE: Ascend by Cirium Asset Risk Rating and analysis
We carried out similar analysis for other key aircraft
types and the results were as shown in the table.
There are a few important caveats to consider. First,
ratings are statistically calculated (prior to review
and adjustments) based on a 95% confidence
interval. We are experiencing a 1-in-100 event
so it would come as no surprise if declines in
Market Value exceed the above figures. To try to
answer this question, we ran our ratings model to
a 99% confidence interval, and the results produce
downside value discounts that are between 2.5%
and 7.5% lower than those produced for the 95th
percentile. Therefore, it would be reasonable to
add an additional 5% downside to the figures in
the table. Even so, the entire model is based on two
major recessions since 2000, and if this one really
turns out to be worse than the last two, even the
99th percentile estimate won’t be enough.
Secondly, these estimates don’t work so well for
all types. When we ran the model for A330-300s
and 777-300ERs we realised that for some vintages
the CMVs today had already reached the 2020
Downside Value, rendering the results less useful.
It is fairly evident that further declines in value for
these types are likely, yet the maximum Downside
Rating only goes 35% below Base Value. This then
leads to the conclusion that Base Values may need
to be impaired in their next revision due to factors
that were already in existence before Covid-19.
14 Ascend by Cirium
Potential decline
New Age 5 Age 10 Fleet average
27% 26% 36% 34%
15% 15% - 13%
19% 22% 32% 26%
11% - - 8%
14% 14% - 12%
14% 12% - 11%
Thirdly, if the crisis extends into the next year or
two, individual aircraft would also experience
depreciation on top of the declines given for
constant ages in the table.
One may also be puzzled by the difference in
results between the A320 and Boeing 737-800,
given that the types are very similar. The first
reason was alluded to earlier, in that A320 Market
Values for early vintages were significantly higher
above Base than those for early 737-800s. The
A320 also has older vintages weighing it down,
and finally; there is a slight difference in rating,
with the 737-800 having been less volatile in the
last two downturns.
We would recommend treating the figures in the
table like the results of an early clinical trial – with
caution, as a lot of things can change in the coming
months and not all side effects are fully known.
However, the general observation is that it is
possible for new technology aircraft to see declines
of 15% or so, while the outgoing generation could
see anything from 25% to 60%. This is just a first
attempt at predicting the near-term future, and we
will continue to give updates as more clarity emerges
on how the recovery in traffic from the current crisis
will pan out. The best we can all hope for is that
the real clinical trials for Covid-19 vaccines bear
fruit soon and we never get to these dreaded lows in
values, but until then, fasten your seatbelts.
cirium.com
 2nd Quarter 2020 Issue 67

How will Chinese lessors

hold up in the crisis?
Scott Zhao, aviation analyst, considers how Chinese
lessors may fare in the current pandemic

yuanfei.zhao@cirium.com

Much has been discussed about the drastic reduction in air traffic and industry revenue due to the Covid-19
pandemic, and the Chinese operating lease sector is not spared.

The analysis focuses on three areas: analysing the
strengths and weaknesses of mainland China lessors
by category, identifying the scope of lessor fleets with
recent lease expiries, and assessing risks faced by
lessees operating fleets within the same scope.
lease obligations. Given that some airlines are
already on the brink of survival and the risk of lease
default is increasing, it then raises the question –
which lessors are more resilient to risks under the
current turbulent market environment?

Lessor differentiation The table gives an overview of the 30 mainland

There is little doubt that lessors are susceptible to
downturns, disruptions or weakness in the aviation
industry because their business is dependent on the
willingness and ability of their airline customers to
enter leases, make lease payments and fulfil other
China lessors, divided into four categories in
terms of fleet profile and lessee distribution. This
summary from Cirium’s Fleets Analyzer only looks
at in-service and storage fleet data of commercial
mainline and regional jets.

Profile of Chinese lessors

Lessor category I II III IV

Number of lessors 5 4 4 17

Fleet size (average) 217 44 42 9

Fleet age (average years) 5.9 5.9 4.7 6.2

Aircraft types (average) 12 6 7 2

Number of lessees (average) 53 18 7 3

4-6 2-4

Lessee regional distribution (including North America (including Europe) 1 1-4

and Europe)

Lessee country distribution (average) 28 9 1 2

SOURCE: Cirium Fleets Analyzer

cirium.com Ascend by Cirium 15

 2nd Quarter 2020 Issue 67
Estimated lease endings in 2020-2021
Lessor category
II
III
IV
0 10 20 30
Number of aircraft
Single-aisle Twin-aisle
Category I and II lessors both have good business
scale in terms of fleet and lessee size, with lessees
distributed across various global regions and
countries. Given these advantages, they have a
more balanced and diversified portfolio of airline
customers with respect to country, region and
business model. Although there may be a risk of
loss of income during downturns, these lessors
have enough scale to minimise the impact by
actively being involved in discussions with their
airline customers and proactively working around
potential aircraft transitions, using their network of
customer contacts.
Category III lessors have an average fleet size and
fleet composition similar to those in category II.
However, the four players solely focus on mainland
China lessees, which limit their flexibility in placing
distressed assets when domestic demand is low.
Furthermore, their customer base is relatively small,
which may limit their ability to remarket aircraft –
16 Ascend by Cirium
40 50 60 70 80
Source: Ascend by Cirium forecast
Regional Jet
when current leases expire and or are not extended
– as well as develop new lease opportunities under
the current market situation.
Meanwhile, the 17 lessors in category IV are
much smaller players in all aspects as many are
new entrants. All the competitive advantages
possessed by category I and II lessors are conversely
disadvantages to those in category IV, making these
lessors the least resilient group.
Scope of fleet
Since it is difficult to say how long the impact of
Covid-19 will last, 2020 and 2021 are expected to
be a critical time to test the business sustainability
of mainland China lessors. For lessors with
aircraft nearing lease expiry during this period,
lease extension and off-lease aircraft remarketing
activities are expected to be more challenging amid
the difficult demand conditions and sustained
competition among lessors.
cirium.com
 2nd Quarter 2020 Issue 67

Given the commercially sensitive nature of aircraft
lease agreements including lease term information,
it is difficult to collect full aircraft lease expiry data.
This analysis has taken an alternative approach and
identified a total of 157 aircraft in Cirium’s Fleets
Analyzer database that are most likely to face lease
expiry. Based on the assumption that typical first
and second lease terms are usually 8-12 and 5-8
years respectively, 136 and 21 aircraft respectively
are expected to see their leases come to an end. The
chart illustrates the distribution of these aircraft
among the 30 mainland China lessors.
Around 88% of the total aircraft belong to all five
category I lessors and three category II lessors, and
the remaining 7% and 5% belong to one each from
category III and IV. Around 87% of these aircraft are
expected to see a first lease term expiry.
Lessee risk assessment
Looking more closely at the 157 aircraft identified,
just over 50 airlines operate these aircraft. Ascend by
Cirium’s proprietary airline scorecard model, which
is designed to assess credit and operational risk of
carriers is then applied to assess these airlines. Our
model is built on 15 key assessment metrics, with a
0-5 risk rating scoring system, where lower scores
indicate higher risk. The number of airlines in each
of the scores are shown in the next chart.
Overall, these airlines have achieved an average
score of around 3 which represents moderate
risk. However, five distinctive metrics stand out
because their average scores ranged 1.0-2.4 lower
than the overall average of 3. Specifically, they are
government support/ownership, fleet financing
method, unencumbered fleet value, financial
strength and profitability metrics.
Three major implications are derived from such a
result, with the first concerning government support/
ownership. Privately owned airlines are regarded

Scorecard for 51 airlines with potential lease endings

OECD Country
Export Credit Risk

Currency Risk

Profitability

Financial Strength

Market Growth Rate

Market Position

Seat Growth Rate

Fleet Size

Unencumbered
Fleet Value
Fleet Financing
Method
Top 20 Operating
Lessor Presence
in Fleet
Default/Bankruptcy
History
Longevity of
Operation
Government Support/
Ownership
Repossession Risk

0 10 20 30 40 50
Number of airlines Source: Ascend by Cirium airline scorecard model

Risk rating = 0 Risk rating = 1 Risk rating = 2 Risk rating = 3 Risk rating = 4 Risk rating = 5

cirium.com Ascend by Cirium 17

 2nd Quarter 2020 Issue 67
as less stable compared with state-owned airlines
because they are not backed by governments, and
therefore have a higher risk of default or bankruptcy
especially in times of industry stress.
The second concerns fleet financing and
unencumbered fleet value. In the current market
situation, airlines with a higher proportion of
the fleet on operating lease are more exposed to
lease rental default caused by drastic reductions
in revenue and high financial burden of leasing.
Airlines with a lower number of unencumbered
(owned) aircraft airlines have less potential for sale
and leasebacks to raise cash.
The third concerns financial strength, which mainly
assesses airlines’ financial performance in terms of
profitability, liquidity, leverage ratio and debt ratio.
Historically, during industry downturns, airlines
inevitably face passenger traffic declines and
suffer revenue losses, and may seek concessions
from lessors such as reduction in lease rental or
maintenance reserve contribution. Furthermore,
they are also more inclined to delay, miss or reduce
rental payments. In extreme cases where airlines
have no choice but to default on their leases or file
for bankruptcy protection, significant cost will be
incurred and adversely affect the financial results
of their lessors.
18 Ascend by Cirium
In summary, the Chinese lessor community is
differentiated and there is a substantial variance
of business strength between lessors, evidenced
by the huge gap between top tier lessors and their
junior counterparts in terms of business scale. Such
distinctions enabled the lessor categorisation in
this analysis, and combined with the 157 aircraft
identified, these results present a clearer picture of
the challenges facing the Chinese lessor community,
as shown in the second chart.
While the current situation is difficult, it is at least
encouraging to see that a relatively large proportion of
the fleet facing lease expiry is with the top tier lessors,
which should be resilient enough to overcome the
current turbulence, provided that the downturn does
not develop into a deeper long-term recession.
The indication from the above analysis is that the
Chinese lessor community as a whole is not overly
exposed to short-term lease extension and aircraft
remarketing risks. Nevertheless, the scorecard
result is somewhat more worrisome, given that the
five underperforming elements are contributing
factors to lessee failures, especially in the context
of a downturn. These less resilient lessors should
really brace themselves, make preparations for
aircraft facing lease expiry and think ahead about
coping strategies for potential lessee default.
cirium.com
 2nd Quarter 2020 Issue 67

From dawn to dusk of

the 777-300ER lifecycle
Valerie Bershova, valuations analyst, considers what to
expect from the secondary market development of the
dominant widebody type
valerie.bershova@cirium.com

The Boeing 777-300ER has established itself as the leader in the widebody aircraft market since its first
entry to service in 2004. Throughout its lifecycle, 777-300ERs eventually replaced 747-400s and facilitated the
development of many new long-haul routes, thus contributing to global air travel growth. The type has had
little competition along the way as the rival Airbus A340-600 could not compete against the -300ER’s lower
trip costs, seat-mile economics and good cargo and passenger capacity.

With this in mind, there are now a number of
questions to be answered. In the current market
environment, how resilient will 777-300ER values
be? Will the values recover post Covid-19? How
many aircraft will be able to transition into the
secondary passenger market and what other options
are there for the ageing 777-300ER fleet?
Today, the 777-300ER has a well-developed fleet
with 818 aircraft delivered to 43 airline operators,

777-300ER top 20 operators

KLM
Air India
China Southern
Airlines
Air Canada
Etihad Airways
Aeroflot
American Airlines
China Eastern
Airlines
United Airlines
Korean Air
Singapore Airlines
ANA-All Nippon
Air China
EVA Air
Turkish Airlines
Saudia
Air France
Qatar Airways
Cathay Pacific
Emirates Airline

0 20 40 60 80 100 120 140

Number of aircraft Source: Cirium Fleets Analyzer

Total fleet

cirium.com Ascend by Cirium 19

 2nd Quarter 2020 Issue 67

with the 20 largest shown in the first chart. The
largest operator is Emirates Airline, with 134
aircraft currently in service and storage. Cathay
Pacific and Qatar Airways operate 52 and 48 aircraft
accordingly. There are 17 aircraft on order.
With large aircraft come large challenges. As the
oldest vintages are now reaching 16 years old,
Boeing is set to end the production of the -300ER
in the next year and will begin replacing it on the
production line with the new generation 777X.
While most -300ERs are still in service, 83 are
scheduled to return off lease over the course of the
next five years.
due to a weak market and growing availability,
backed by a number of recent transactions.
So far, there have been just 2% of -300ERs
transitioning into the secondary market – around 20
aircraft, largely ex-Emirates into Russia with several
operators. While this is a small volume, one should
consider that the fleet is still relatively young
and more transitions are likely to follow in the
coming years. However, Russia’s market capacity
has its limitations, so opportunities for further
development in this region would be limited. There
have also been secondary market transitions into
Turkey and Pakistan.

Additionally, we now see the first impact of Ascend by Cirium’s Aircraft Scorecard currently
Covid-19 and more pressure on Market Values. In views a 777-300ER as a medium risk asset with
early Q2 2020, Ascend by Cirium reduced Market growing volatility and storage rates – the latter having
Values by between 4% and 20% for the 777-300ER already been the issue prior to Covid-19, including 10

777-300ER fleet age profile

Number of aircraft
90

80

70

60

50

40

30

20

10

0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Build year Source: Cirium Fleets Analyzer

Total fleet

20 Ascend by Cirium cirium.com

 2nd Quarter 2020 Issue 67

777-300ER Part-Out Value forecast – Base scenario

US$ (mn)
60

50

40

30

20

10

0
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038
Source: Ascend by Cirium 777-300ER Part-Out Model

Airframe Engine Base Value (shipset) Engine QEC/Accessories (shipset)

parked aircraft from failed Jet Airways fleet. Among
issues for passenger transitions are the cost of cabin
reconfiguration, with examples seen between $15-25
million and also the cost of engine overhauls.
Trading activity has slowed over the last few
months. Last month, however, leasing platform
BOC announced a sale and leaseback of six Cathay
Pacific 777-300ER aircraft, although this transaction
is set to be more of a strategic move for the lessor.
In October last year, GECAS and IAI announced
the 777-300ER Special Freighter conversion
programme, with GECAS being the first customer
with 15 confirmed orders and 15 options. The
development now provides another option for the
secondary market.
Converted freighter aircraft will offer a larger
volume compared to a factory built 777F, with
10 additional pallet positions and lower cargo
densities. It will also have eight more pallet
positions than a 747-400F and GECAS says it
will be able to cover 95% of 747-400F routes
due to its payload range characteristics. GECAS
acknowledged some 20 potential conversion
candidates in its 777-300ER fleet with some of the
aircraft being just 13 years old.
The freighter conversion completion will take
about four to five months for each aircraft. With
certification and entry to service expected in 2022,
Ascend by Cirium in 2019 forecasted at least 70 777-
300ER conversions through the next two decades –
which makes up a total of 9% of the fleet. This may
be conservative and GECAS’ own estimate is double
that. With a high volume, it should prove attractive
to integrators and e-commerce cargo operators.

cirium.com Ascend by Cirium 21

 2nd Quarter 2020 Issue 67
A comparable study of widebody conversions
for the 747-400 shows that some 20% of the 522
passenger jets were reconfigured for cargo or other
operations, as per Cirium’s Fleets Analyzer. Only
15% of the aircraft in the fleet transitioned into
passenger secondary markets to new operators.
At the time of programme launch in 2019, the 777-
300ER conversion cost was estimated at some $35
million, although an official number has not been
revealed. On top of that, the maintenance condition
of the aircraft to be converted is important – a “full-
life” aircraft, fresh from major checks, would not
require significant additional investment, whereas
an aircraft with run-out engines will need a $16.20
million investment to overhaul and replace life
limited parts (LLPs) on just one of the engines. Good
maintenance condition of the airframe would need
to be combined with low Market Value, in order to
make an aircraft attractive for a freighter transition.
The 777-300ER benefits from a single engine choice
which will be key to support fleet commonality
for the operators that already have these aircraft
in the fleet. General Electric is also supporting the
conversion programme and is working together
with GECAS to support packages for the -300ER’s
GE90-115B for the freight sector.
Analysis of the 777-300ER fleet age profile shows
that while some of the delivered aircraft have now
reached mid-life age, a substantial proportion of the
fleet is still between four to seven years old today,
and will likely not reach part-out age in the late
2020s or early 2030s.
22 Ascend by Cirium
What are opportunities for part-out? The third
chart shows Ascend by Cirium’s 777-300ER part-
out model in “half-life” condition. We currently
estimate a part-out value for the 777-300ER at
$51.4 million, driven by the high value in the
GE90-115B engines.
Towards the end of the decade and through the
2030s, the values of the engines will see a significant
decrease as 777-300ER part-outs increase and the
in-service fleet diminishes.
There have not been any 777-300ER retirements
so far which is, however, justified by the age of
the fleet. As per Cirium’s Fleets Analyzer, there is
currently one 12-year-old ex-Jet Airways aircraft
that is scheduled to be permanently withdrawn from
use in June this year. In the coming 12-18 months,
we could also see some operators taking advantage
of early retirements due to the impact of Covid-19.
Should this happen, we would likely see pressure
on the Part-Out Values as the engines market could
become saturated sooner than expected. Through
the 2020s, the Cirium Fleet Forecast expects an
average of 25 aircraft retiring from passenger service
annually, which will still leave a fleet of 500 in
service in 2030.
The 777-300ER has replacement options by the
slightly smaller A350-1000 and the slightly larger
777-9. To date, out of 43 airlines that currently
operate 777-300ERs, only seven have so far secured
orders for 777-9s. Delivery has been delayed to 2021
and it remains to be seen if further delays will occur
due to the current crisis.
cirium.com

While replacements will be available, 777-300ERs
will still require an exit strategy. In addition to
the secondary market transitions and freighter
conversion, other options could include passenger
cabin modifications to
expectations. As such, in co-operation with Boeing,
Aeroflot is reconfiguring its fleet of 19 777-300ERs
to enhance premium quality and service across
aircraft cabins.
In the current market environment, we observe that
early 777-300ERs are unable to command the same
values that they would in a stable market. Therefore,
it will be even more challenging for later vintages,
Europe, Middle East and Africa
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The information contained in our databases and used in this publication has been assembled from many sources, and while reasonable care has been taken to ensure accuracy, the information is supplied on the understanding
that no legal liability whatsoever shall attach to Ascend by Cirium business, Reed Business Information Limited, its offices, or employees in respect of any error or omission that may have occurred. All intellectual property rights in
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cirium.com
2nd Quarter 2020 Issue 67
especially those at the end of the production cycle,
to have better value retention even in the next five
years as there will be more availability in the market.
better meet market The 777-300ER market had already been challenged
prior to the impact of Covid-19. As there is now a lot
of uncertainty across the whole aviation industry,
the questions we asked in the beginning of this
article remain unanswered. The 777-300ER will
remain a key player in the long-haul market, but
will all the current fleet still be required? It may take
a few years to find out how the demand for long-
haul traffic will recover and how this translates into
the requirement for -300ERs.
For more information
Visit our website:
cirium.com
Or get in contact:
info@cirium.com
Ascend by Cirium 23
YES AND
KNOW
B E T T E R I N F O R M AT I O N T O M O V E Y O U.
I N T R O D U C I N G C I R I U M. B R I N G I N G TO G E T H E R P OW E R F U L DATA
A N D A N A LY T I C S T O K E E P T H E W O R L D I N M O T I O N .

A s m a r t e r wa y.

CIRIUM.COM