ANALYSIS: 777 Classics entering their twilight years

Although there have been some small signs of life, a growing number of Boeing 777-200s and -300s appear to be headed for the scrapyard amid growing supply and poor interest in the secondary market.

It has been a tough few years for the widebody twin, with availability of -200s/-200ERs and -300s rising following Malaysia Airlines' dumping of its 777-200ERs in 2015 and the collapse of Transaero in the same year. Still, a number of those aircraft were picked up by other Russian operators, such as VIM Airlines and Rossiya.

But the situation was not helped when, also in 2015, Delta Air Lines' then-chairman and chief executive Richard Anderson said his airline had been offered 777-200s for less than $10 million. While that set tongues wagging, there was little indication that airworthy aircraft with life left in them were being traded at such levels.

Values for the type have yet to reach that level, but Flight Values Analyzer data shows that the 777-200ER's values have declined faster than other twin-engined widebodies - down about 45% since January 2014. That compares with declines of about 30% for Airbus A330s and Boeing 767s over the same period.

A large factor in that is the lack of a major secondary operator for 777-200s and -300s. A small number have transitioned to budget, charter and ACMI operators, but these are exceptions rather than the rule.

"Clearly the relative illiquidity of these types in today's market has had a significant impact on values," says Flight Ascend Consultancy head of consultancy Rob Morris. "The 777-200ER has marginally better liquidity but with recent placements at the likes of Air Peace of Nigeria and Zimbabwe Airways, this market is clearly limited."

The supply of used 777s without operators has been growing over the past year, with Emirates, Singapore Airlines, All Nippon Airways and China Southern Airlines already drawing down their 777 Classic fleets. More carriers could also dump aircraft in the coming year, with Flight Fleets Analyzer indicating that at least 23 aircraft come to the end of their leases in 2018.

Some aircraft have been picked up by Boeing Capital Corporation. Fleets Analyzer shows that between August 2015 and the end of July it will have bought four 777-200s, and is also scheduled to take three aircraft from China Southern Airlines.

While Boeing Capital has managed to transition some of those aircraft to new operators, it has also retired two jets, and to date 43 Classic 777s have now been retired, representing 7.5% of the fleet.

"This is not unnatural given that the 777-200 fleet age ranges from three to 22 years which places the older aircraft at the inflexion point of the widebody survivor curve," says Morris.

SOME SIGNS OF ACTIVITY

Although the trend for the 777 Classic is towards retirement and part-out, some full-service carriers still see life in the type.

United Airlines and British Airways have both announced major cabin refits for their 777-200s and -200ERs. Flight Fleets Analyzer shows that a number of 777-200s coming to the end of their leases over the next few years with Air France and KLM look to be likely candidates for lease extensions.

From next year, Cathay Pacific will take five ex-Emirates 777-300s it has bought from AerCap to replace its five 777-200s. They will join 12 other -300s in its fleet, with all 17 aircraft powered by Rolls-Royce Trent 800 engines.

Those aircraft will be reconfigured to increase their capacity to 396 seats and will be deployed on regional services. The upgauging will be achieved largely through switching the economy cabin from a 3-3-3 seating layout to 3-4-3 seating.

Morris expects that the Cathay transaction is likely to be a one-off, driven by a desire to increase capacity on regional routes amid a dearth of slots at Hong Kong International airport over the next few years.

Asahi Aviation also recently brokered the sale of another Trent-powered 777-300 on behalf of a Japanese investor. While the new owner's identity was not disclosed, Asahi told FlightGlobal that it intends to offer it for lease.

Some carriers have also chosen to densify 777-200s, which lowers the type's unit costs. Scoot's 777-200ERs, which have now been replaced by 787s, operated with 402 seats in a dual-class layout - close to the capacity of most 747-400s.

But those cabin changes do not come cheaply. One industry source tells FlightGlobal that the cost is about $10 million per aircraft, and that has to be weighed against the expected operating life.

Added to that are complications around the Classics' engine choice. The majority of the aircraft are fitted with Rolls-Royce Trent 800s, but General Electric GE90s and Pratt & Whitney PW4000 engines were also offered. For some potential operators, that makes it difficult to source aircraft with the same engines.

The industry has also been critical of what it sees as inflexibilities and high costs for most of the Trent engines that have been tied into power-by-the-hour agreements. Nonetheless, one source notes that as more Trent-powered aircraft are parted-out, it is possible that more engines with green time on them could enter the market.

Ascend senior analyst Richard Evans points out that fewer Trent-powered aircraft have been scrapped.

"Proportionately more P&W aircraft have been parted-out, which may reflect trading of engines, and help lower overhaul costs," he adds.

One airline told FlightGlobal recently that its PW4000-powered 777s have suffered a number of unserviceability issues, and as a result it is returning them one year ahead of their scheduled lease expiries.

FREIGHT EXPECTATIONS?

Most widebody types have historically found a second life as freighters, but so far there has been little progress on a conversion programme for Classic 777s.

Boeing started studies in 2008 for a potential conversion programme, which could see it offer a converted 777-200ER with a payload of about 81t - significantly lower than the 103t payload of the 777-200LR Freighter.

That study appears to have gone nowhere, with concerns about issues of cost, timing and suitable feedstock of aircraft for conversion.

In the OEM's absence, IAI's Bedek division has stepped in. In April, it announced that it had secured a launch customer for its planned 777 freighter conversion line. Although the customer's name has not been disclosed, IAI expects that the first conversion will be completed by mid-2020, based on the expectation that a contract would be signed at mid-year and development taking three years.

While significant, many observers feel that the 777 converted freighter will face a number of challenges. The first will be replacing the composite floor beams with steel ones to allow it to carry freight.

Then, there is a big question mark over who will take the aircraft, given an environment where Boeing is fighting hard to sell new-build 777-200LRFs and 747-8Fs.

That leaves the future of the 777 Classic fleet looking rather bleak, particularly as more efficient and capable aircraft continue to push them out of the global fleet. Clearly, the type is heading rapidly into its twilight years.

Additional information

In January 2011 British Airways merged with Iberia. The merger resulted in the creation of the International Airlines Group (IAG), a holding company registered in Madrid, Spain. IAG is the world's third-largest airline group in terms of annual revenue and the second-largest in Europe. IAG is listed on the London Stock Exchange and in the FTSE 100 Index.

Imagine you work as a financial accountant for British Airways operating a fleet of various aircraft types including the Boeing 777-200 and Boeing 777-200ER. Based on the information contained in the article:

Required

a) Provide an argument for and an argument against measuring the company's fleet of Boeing 777-200 and Boeing 777-200ER using the following measurement methods:

Cost

Replacement cost

Net present value

Current market value

b) Based on your arguments relating to each measurement method in part (a); Explain which specific measure from the list provided will be most useful from the perspective of each of the following stakeholders. In your answer, consider the decision usefulness of accounting information produced when using each of the above figures as a measure of the fleet's value. Justify your answer by explaining in detail why the measure chosen is the most suitable as a decision-making aide for the stakeholder group being discussed, based on their specific needs.

Stakeholders

Shareholders

Board of directors

Lenders, specifically fleet's financiers

Employees, specifically aircraft maintenance personnel

You may wish to provide your discussion using the following tables:

Part (a)

Measurement method Argument for Argument against

Cost

Replacement cost

Net present value

Current market value

Part (b)

Stakeholders Decision usefulness of one of the measurement methods Justification

Shareholders

Board of directors

Lenders, specifically

fleet's financiers

Employees, specifically

aircraft maintenance

personnel