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Used Jet Market Takes Off : Backlog of Orders for New Airliners Fuels Demand for Old Ones

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<i> Times Staff Writer </i>

The Vancouver Canucks of the National Hockey League wanted to travel in style, so they bought a used Boeing 727 not long ago. The plane, which had already seen duty for about 13 years with United Airlines and USAir, cost the team about $2 million. But it turned out to be too costly for the Canucks to operate, so they sold it to a Venezuelan airline for $4 million only 14 months later.

“That’s better than selling tickets,” said Richard L. Spaulding, president of USAir Leasing and Services Inc. And it reflects the fact that there is a hot market for used airliners because new planes are in such demand that manufacturers have significant backlogs of orders.

Spaulding’s company, a subsidiary of USAir Group that markets used aircraft for USAir and other airlines, airplane manufacturers, banks and other financial institutions, handled both transactions for the Canucks.

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He is president of the International Society of Transport Aircraft Traders and says its 175 members have been kept busy lately, scurrying around in a search for used planes. Wide bodies, such as Boeing 747s, McDonnell Douglas DC-10s and Lockheed 1011s, are especially in demand.

Airlines placing orders for new planes these days are looking at a three- to five-year wait for most models. As a result, they are either holding onto their older planes or buying used ones.

So prices have skyrocketed. A 15- to 20-year-old DC-9, for instance, which sold originally for $4 million, would bring $7.5 million today, Spaulding said.

Michael Chowdry, president of Aeronautic Leasing in Denver, which buys used planes and leases them to airlines throughout the world, said: “Airlines have this big thing about maintaining market share. . . . They want to protect their turf--and how do you protect your turf? With equipment. But there is no equipment.

“If you order a Boeing 747 today, you have to wait four or five years. So they have to settle for used aircraft, and they are willing to pay almost any price.”

Chowdry said his company bought a 17-year-old 747 from a financial institution about four months ago for $32 million. Aeronautic Leasing has already been offered more than $37 million for the plane but does not plan to sell because, as Chowdry put it, “We believe in the value of the aircraft.”

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Even much older planes are hot sellers. Boeing’s veteran 707s were selling for $500,000 to $800,000 eight or nine years ago, said James E. Matthews, head of American Aeronautics Group of Orlando, Fla. At that time, he pointed out, 707s were already more than 20 years old and “ready for the scrap heap.”

But then a “hush kit,” costing $3 million, was put on the market to convert the planes so they can pass current noise restrictions in the United States and abroad. That breathed new life into the 707. “I have a client in Canada,” Matthews said, “who has asked us to find him a 707 and who is willing to pay $7 million for it” after noise modifications.

Even before demand for new planes heightened to current levels, prices of used airliners held up well. “No used jet transport has ever sold for less than it cost new,” said Paul Turk, an official of Avmark, an aviation consulting service in Arlington, Va., that specializes in airplane prices.

There were, of course, dips in the market at various times, and the value of planes dropped in the 1970s, when fuel prices shot up and the economy dipped.

Doug Dunn, Delta Air Lines’ vice president for purchasing, recalled as an example that in 1987, when the airline had nine DC-10s it wanted to unload, it “couldn’t give them away. We could have parked them in the desert,” he said. Today, such planes are selling for $18 million to $20 million each, he said.

But not all carriers like to buy secondhand planes. American Airlines, for example, has found that the modification and maintenance work required on a used airliner adds 30% to the price. Thus, said Daniel Garton, managing director of financial analysis for Dallas-based American, “It is generally more economic to buy new planes.”

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In addition, American likes its fleet to have “commonality”--a preponderance of planes from one manufacturer to hold down the costs of maintenance and crew training. “It’s hard to achieve this by twosies and threesies,” Garton said.

Recent Exception Made

Nevertheless, American will make an exception “in a pinch,” he said. It recently bought two 15-year-old 747s from Trans World Airlines that it needed for its new Dallas-Tokyo route. Without the planes, it would not have been able to inaugurate the service. “They were the only long-range planes available,” Garton said.

But, like American, other successful, well-established airlines are reluctant to buy used aircraft. Such planes are usually purchased by upstart airlines that cannot afford new ones and by airlines that are in financial difficulty. Carriers in Third World countries also buy many used aircraft.

Not all airlines are as fortunate as American was in securing the two 747s to begin its Tokyo service, though. The inability to locate planes has disrupted the business strategy of more than one carrier--Virgin Atlantic Airlines, for example.

The fledgling airline, owned by British entrepreneur Richard Branson, operates flights between New York, Miami and London and had intended to begin flying a Los Angeles-London route this spring. But it has had to put those plans on hold because it cannot find the necessary planes.

Production Behind Schedule

It has arranged to obtain two Singapore Airlines 747s, but Singapore has not released the planes, as its own order for new 747-400s from Boeing has been delayed for at least three months because the Seattle manufacturer’s production has fallen behind schedule. Virgin Atlantic says it cannot find suitable planes anywhere else.

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“This is restricting our growth,” David Tait, the airline’s executive vice president, said. “There just aren’t any planes around.”

Actually, even after it gets the planes, Virgin Atlantic will not own them. It will lease the 747s from Los Angeles-based International Lease Finance Corp. But Tait said ILFC will pay about $40 million each for the planes, about $5 million more than they would have cost a couple of years ago. And that will boost Virgin Atlantic’s cost of leasing them.

Despite manufacturers’ attempts to roll an ever-increasing number of airliners off their production lines, the backlog of orders keeps growing.

During 1988, the Boeing Commercial Airplane Co., which accounts for more than half of the Western world’s supply of new airliners, received a record 636 orders for planes worth $29.7 billion. This contrasts with the orders for 366 aircraft worth $19.89 billion it got in 1987. The company has a backlog of 1,112 orders.

The backlog for all U.S. and Western European airplane builders is more than 3,100 orders, which would keep them busy for at least four years at present production rates. And the manufacturers are straining to speed production so they can take even more orders. U.S. airlines have $59 billion worth of airplanes on order--including firm orders and options--nearly three times the level in 1983.

To help accommodate the surge in orders, Boeing has speeded up its production rates from 25 airliners of all types a month to 34 a month and plans to pick up the pace even more.

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Airlines, until fairly recently, had been resisting the urge to buy new planes. After all, fuel prices were low, so there was no great need to replace planes with new, more fuel-efficient ones that also require only two crew members in the cockpit instead of three.

The rising price of new planes was another reason for the delay in ordering new planes. Louis L. Gonda, executive vice president of ILFC, said the cost of a jet has risen from about $50,000 a seat in 1973 to more than $200,000.

But now, airlines are ordering despite the high prices. Fuel prices are up a little, but other factors have also prompted the surge of new orders.

More Passengers Per Plane

For one thing, airlines must comply with the government-imposed noise regulations. For another, to cope with overcrowding at airports, carriers have been buying larger aircraft to allow them to cut the number of flights. A new mid-range 767, for example, carries as many as 260 passengers--about the same as two smaller and older 727s or DC-9s.

But replacing old planes is not the main reason for the new seller’s market in airliners. The lion’s share of the new planes is being bought, industry observers say, to accommodate the large and continuing growth in passenger traffic. And many old planes being taken out of passenger service are finding new lives in the rapidly growing overnight air cargo business.

Surveys indicate that passenger traffic will rise 7% annually for at least the next few years and that there will not be enough planes to accommodate the surge.

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Since a large section of the fuselage of a 19-year-old Aloha Airlines 737 ripped away during a flight last April, killing a flight attendant and endangering all others aboard, pressure has increased on the airlines to retire older planes. In fact, the airlines fear that the government might legislate a maximum age for airplanes.

35-Year Life Spans Seen

According to Avmark, 21.4% of the jet airliners in the Western world are 20 or more years old, and 40.1% are 15 years or older. But Avmark contended in a recent newsletter that, despite the safety problems with older planes, as long as airliners are inspected regularly and maintained properly, they have “useful technical and economic lives of 35 years or more.”

A recent report by McDonnell Douglas estimates that 2,500 commercial airliners--40% of the world’s commercial jet fleet of 6,200 planes--will be retired during the next 15 years. More than half of these retirements will occur between 1992 and 1996, when the airlines must replace a vast number of DC-9s, 727s and 737s that were delivered in the latter half of the 1960s.

The shortage of new and used planes has resulted in yet another phenomenon. Airlines, recognizing the skyrocketing value of their airplanes, are selling new, nearly new and old planes to financial institutions, then leasing them back and continuing to use them.

10% to 15% Return on Money

The lessors are rapidly increasing their investments in airplanes because they consider the airlines to be good risks on lease arrangements and because, typically, they can earn a 10% to 15% return on their money, industry analysts say.

Jack Feir, head of a New York aviation consulting firm, has dubbed the last two years “the golden age of aircraft sales and lease-backs.”

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In the 18 months ending last June, more than 130 aircraft worth $4 billion were sold to lessors by airlines, Feir said. During the 18 months, there was a total markup of $684 million from the manufacturers’ price of the planes, an average of more than $5 million.

For instance, in 1987 and early 1988, USAir bought 15 new Boeing 737s for $316.8 million, or $21.1 million each. The airline quickly sold the planes for $390 million, or $26 million each, and leased them back.

Recent tax law changes also play a role in the new environment, mainly the elimination of investment tax credits and accelerated depreciation, policies that had previously encouraged airlines to own their aircraft. In addition, Feir said, the airlines are trying to reduce their debt.

The trend is expected to continue. Helane Becker, an airline analyst with Shearson Lehman Hutton, said 30% of all U.S. airliners are leased today; in the 1990s the figure will reach 60% to 70%. American Airlines is a good example of the trend. In 1983, it operated $500 million in leased aircraft; this has climbed to $6 billion worth.

Some airlines are even selling their reserved positions on manufacturers’ assembly lines, in a sense speculating in an airliner “futures market.” If they got their orders in for new planes before the rush began, they are able to realize quick profits from their farsightedness by selling their spots on production schedules to lease firms and other airlines desperate for the new planes.

Old Planes Refurbished

Meanwhile, the heightened demand for older aircraft has caused some carriers to put retired planes back into service. In Arizona, between Phoenix and Tuscon, is something called the Evergreen Air Center--sometimes called an airplane “graveyard” or “boneyard.” It is a place where old, unneeded airliners are brought to sit--without rusting away--in the dry desert air.

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But the desert facility is starting to empty out. Until recently, 106 planes, including numerous wide-bodied jumbos, were in mothballs there. But the number is down to 40, with more planes being refurbished and flown out daily.

“I wish I had started a diary when I came here 16 years ago,” said A. E. (Schnozz) Mayer, an Evergreen executive. “I’ve seen planes come and I’ve seen them go. I’ve seen this place empty and I’ve seen it full. When the economy dips and when fuel prices rise and when some of the 727s become too old, this parking lot will be full up again.”

THE AGING AIRLINE FLEET Average age of aircraft by type as of July 1, 1988

Aircraft No. in Average Type Manufacturer Service age (years) DC-9 McDonnell-Douglas 387 18.18 727 Boeing 987 14.97 747 Boeing 136 14.79 DC-10 McDonnell-Douglas 96 13.20 L-1011 Lockheed 97 11.79 737 Boeing 631 8.40 A300/A310 Airbus Industrie 82 6.09 767 Boeing 111 4.57 MD-80 McDonnell-Douglas 318 4.19 757 Boeing 100 3.84

Source: AVMARK Inc.

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