Welcome to my latest expert Q&A. With me today is Tony Karafiat.
Tony is director of asset evaluation at Avitas, a leading aviation consulting firm based in Fairfax, Virginia.
Tony also is a CFA and CPA. At Avitas, Tony’s duties include the preparation of appraisals, market analysis, aircraft studies, strategic planning, and financial analysis.
Tony has extensive corporate experience. Notably, while at United Airlines, he was responsible for vendor negotiations, lease, buy, and sale decisions for aircraft and engines, fleet mix analysis, budgeting, and made equity and debt investments in their regional affiliates.
The following article is a substantially condensed transcript of our discussion, to provide you with a quick read. For the full video interview, visit: https://www.youtube.com/@JohnPersinos
My questions are in bold.
With talk of renewed tariffs, signs of resurgent inflation in some regions, and a broader global economic slowdown, how are these macro headwinds affecting aircraft valuations and lease negotiations, especially for cross-border deals?
The broader airline industry enjoyed a banner year in 2024. Air travel demand surpassed 2019 levels in early 2024 by 4%. Airlines earned net profits of over $30 billion in 2024.
There are signs of optimism coming into 2025. Unemployment is still very low. Asia/Pacific traffic is strong and accelerating faster than the rest of the world.
Meanwhile, the supply side has been impacted by several factors. Supply chain and regulatory impediments have imposed constraints on aircraft production.
Given this reduction in the supply of new aircraft, airlines are delaying retirements and flying older assets for longer; extending leases; and sourcing aircraft from the secondary market.
The mix of these supply-side constraints has led to aircraft and engine prices and lease rate factors that have seen significant increases over the past year. In addition, there are signs of optimism for the global economy.
The supply shortage is more than compensating for tariffs, inflation, and broader global economic worries. That said, we’re seeing cost pressures in the industry, primarily from labor and MRO services.
How is the ongoing production slowdown at Boeing, especially around the MAX, affecting the value of older 737NGs and their lease rates in the secondary market?
There are roughly 3,000 unfilled orders for MAX 8 and 9 aircraft, not to mention the 1,500 or so for the uncertified 7s and 10s. While the narrowbody backlog supported about three years of production in 2001, the current backlog of MAX 8s/9s at Q2 production rates would be ~8 years.
To Boeing’s credit, the company has been increasing production rates and working closely with the FAA to make sure they are meeting expectations. Boeing shipped 42 MAX A/C in June, for 102 in 2Q vs. consensus expectations of 98.
So you’re spot on in your implicit assessment that production delays are feeding into an increased demand for existing metal.
Lease rates for mid-life NGs and ceos have climbed north of 40% over the last three years, while MAX/neos have increased ~25%. We’re definitely seeing a continued theme of strong demand for mid-life aircraft.
Cargo conversions and freighters such as the 747-400BCF and A300-600RF seem to be holding value surprisingly well. What’s your take on the freighter market in 2025 and beyond?
Freighter aircraft are retiring faster than they are being replenished. Atlas Air’s CEO Michael Steen was quoted as saying “widebody freighter capacity additions would struggle to keep pace with demand growth, given the need to retire older aircraft and the lack of new aircraft able to enter the market.” We at Avitas agree.
The 777 program is mandated by ICAO to end in 2027. The 777-8F and A350F programs will begin in 2027/2028, so you could have a gap between the end of the 777F line.
There also are three conversion providers (IAI, Mammoth, and KMC) for the 777-300ER, but these vendors still haven’t received their certificates and the feedstock could be limited.
What role does used aircraft inventory play in influencing values today? Are we in a buyer’s or a lessor’s market?
In a given year, lessors will trade ~10% to 15% of their portfolio as assets near the end of their lease. As we spoke about earlier, mid-life aircraft are seeing strong residual values, high rates of extension, and increasing lease rate factors.
All of these are signs of healthy liquidity in the market. It’s a great time to own aircraft. Whether you are an airline looking to enter into a sale leaseback or a lessor renewing leases, you’re seeing high demand translate into strong economic terms for those with access to the metal.
Looking ahead to the next three to five years, which aircraft families—either from Airbus, Boeing, or emerging OEMs like COMAC—do you see as gaining momentum in value and lease premium?
We saw NGs and ceos with lease rates +40% over the last three years, but new tech new builds are only up +20% over the same time frame.
As long as the supply/demand imbalance remains comparable to today, this relationship should remain, with older generation aircraft appreciating at a faster clip than new deliveries.
As more airlines and lessors wait for new tails to arrive, it puts a premium on the used aircraft in the market. Eventually, there’s an upward limit on how much the market is willing to bear for used tails and that’s twofold:
1) You’ll see a ceiling as the price for old metal approaches that of new deliveries, and
2) Higher interest rates will mute demand for how much investors are willing to pay for both new and old aircraft. We’re already seeing some of those pandemic-era debentures needing to be refinanced and rates are not as attractive as the generational lows we saw in the 2010s.
Thanks for your time.
