INSIDE:

ASCEND: RETENTION AND

VOLATILITY OF AIRCRAFT VALUES

VEDDER PRICE: US EX-IM’S

RESPONSE TO THE DOWNTURN

IBA GROUP: UNDERSTANDING

ENGINES AS ASSETS

BOEING: THE CHANGING FACE

OF AIRCRAFT FINANCING

Sponsored by DVB Bank SE

2011 Edition
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international transport finance

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 AIRCRAFT FINANCE GUIDE

Financing the A320 Family

Since the recent credit crunch, the term ‘no-brainer’ is often associated with bankers rather than anything
else. Traditionally though, the term is used to describe transactions involving credits or aircraft that are
considered a safe investment, promising the bank a trouble-free transaction. For most asset based
lenders, the A320 Family comes close to being a no-brainer aircraft type. Bert van Leeuwen, head of
aviation research at DVB bank discusses the pros and cons of financing the A320 Family aircraft.

T HE A320 WAS LAUNCHED OVER 20 years ago in 1984

and made its first flight in 1987. Today, there are over 4000
aircraft in the global fleet and over 2300 more on order. Flying
for over 300 operators, the A320 family possesses most of the
characteristics believed to make an aircraft ideal for asset based
financing purposes; versatility, great market liquidity and a
stable, long value history. Although the majority of A320 family
aircraft have proven well suited to asset based transactions as
with any family, there are a few black sheep among the group.
HISTORY
For the European Airbus consortium, the A320 was the
first product in the short- to- medium haul single aisle jet
market. While Europe had already entered the market with
Mercure, Caravelle, Trident, and BAC One-Eleven, the US had
dominated with the JT8D powered Douglas DC-9 and 727 and
737 Families. In the early 1980s McDonnell Douglas was the
first to adapt the DC-9 to the higher fuel cost environment and
the upcoming Stage III noise-regulations by stretching the DC-9

36 AIRCRAFT FINANCE GUIDE 2011


and re-engining this DC-9 Super 80 (later renamed
MD-80) with an improved version of the JT8D
engine; the Series -200. Boeing responded with a
stretched and modernised version of the 737-200,
called the -300. The 737-300 was the first of the
737 generation now known as the Classics (-300,
-400 and -500). One of the major contributing
factors to the success of the 737 Classic was its
new, clean, quiet, and fuel-efficient GE/SNECMA
CFM56-3 engine. While the 737 Classic was
slowly gaining market share compared to the MD-
80, Airbus planned an attack on the American
manufacturers dominating the single aisle market.
These plans eventually took the form of a truly
high tech aircraft featuring among other things;
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revolutionary fly-by-wire technology, side-stick
controllers and containerised belly cargo space.
Initially only powered by the -5A derivative of
the CFM56 engine, the first Airbus narrowbody,
designated A320 made its first flight in early 1987.
While some of the European flag carriers
where ‘natural’ launch customers for the A320,
it took more effort to find customers outside
of Europe and with the bankruptcies of early
North American A320 customers (including Pan
American and Braniff) a number of early A320s
were parked in the Arizona desert.
Eventually North America and the rest of the
world warmed to the A320 and Boeing was forced
to modernise its narrowbody offering. Sticking
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to the familiar 737 designation and other typical Boeing
narrowbody characteristics, in 1997 Boeing introduced the 737
Next Generation (NG).
Although both manufacturers had victories in the battle for
market share, one win for Airbus proved a breakthrough in
an increasingly important market segment. In 1999, JetBlue
introduced the low-cost carrier (LCC) market to the A320 – a
market segment that was traditionally dominated by Boeing’s
737, largely because Southwest Airlines (the role model for all
LCC’s) was a dedicated 737 operator.
Today, the A320 family aircraft can be found on all
continents, flown by operators with business models from
corporate Jet to LCC, and from leisure charter to scheduled
network. With the new order intake almost exploding
just before the outbreak of the downturn, Airbus claimed
production capacity was their main challenge. For this, as
38
well as strategic and political reasons, final assembly of the
A320 Family was expanded from the traditional factories in
Toulouse and Hamburg to a third line in Tianjin (China). The
Tianjin factory is reportedly a copy of the Hamburg plant
and Airbus has assured all interested parties there will be no
difference between Europe- and Asia- produced aircraft, hence
there should not be any difference in the ability to finance
these aircraft.
After the 737NG was launched to match the A320 the
150-seater narrowbody market enjoyed a balanced duopoly
– neither of the types were able to claim a decisive market
advantage over the other. For financiers as well as investors,
this stability has provided a strong stimulus to commit funds
as, until recently it looked like the obsolescence risk for the
A320 and the 737NG was very low. However, things may
change.
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 the A320 family aircraft under the same type rating. Cross
A320 FAMILY MEMBERS
AND THEIR OPPONENTS
The basic 150-seater A320-100 made its first flight in
February 1987 but this version was quickly superseded by
the more capable high maximum take-off weight (MTOW)
-200 version. In 1993, a 185 seat, 6.93 m. stretched version
called the A321-100 made its first flight. In 1997, the -100 was
effectively superseded by the more capable A321-200. and in
June 1995, the A320 and A321 was given a sister in the form
of the 124 seat A319-100, featuring a 3.73 m. shorter fuselage
compared to the A320. In 2002, the fourth and final family
member made its first flight; the 107 seat A318-100 ‘double
shrink’. The A318 was aimed at operators with a small
requirement for 100-seat aircraft but a desire to maintain
fleet commonality. Cockpit commonality has always been
a major strength of the A320 family and a pilot can fly all
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crew qualification allows A320 pilots to fly the in-production
Airbus widebody models as well.
Although they are not always a perfect match in terms of
capacity, each A320 family member is effectively competing
head-on with a matching member of the 737NG within roughly
the 100-200 seat market segment. In addition, most A320
versions face competition from some outsiders. However,
neither Airbus nor Boeing can claim complete superiority in
the narrowbody market. Both families have their own problem
children (the 100-seaters), and both have their superstars (the
A320 and 737-800). Despite attempts from Toulouse and Seattle
to demonstrate technical or commercial superiority, most asset
based financiers are equally happy to finance the mainstream
Airbus and Boeing products, but it certainly requires a more
in-depth analysis to distinguish between the more and the less
suitable variants of both families.
Since the first A320-100 Airbus has refined and expanded
its original single-aisle design. Shortly after the launch of
the A320-100, the A320-200 was proposed. The short range
A320-100 featured a low MTOW, wing fuel tanks only and
no wingtip fences. All 21 A320-100s built are equipped with
CFM56-5A1 engines. A marginal aircraft from the start, the
A320-100s received 20 orders — only seven of which remain
in operation. The type has never been seen as suitable for asset
based financing.
This can not be said for the A320-200, which from an asset
based finance view point is close to perfection. However,
within the 2250 A320-200’s flying today, there are a few niche
versions that differ enough from the popular mainstream
aircraft to affect their suitability for financing.
Firstly, the A320-200 has a wider choice of engines compared
to the 737NG. While Boeing elected to offer only CFM56-7B
engines (at different thrust levels), Airbus offered a choice
between the International Aero Engines (P&W/RR/MTU/JAEC)
V2500-A1/A5 series and the CFM International (GE/Snecma)
CFM56-5A/5B series, both at different thrust levels. From a
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financing perspective, it can be argued that the split of the A320
fleet into CFMI and IAE powered aircraft is a negative factor.
Although the competition between the two engine consortia
may result in a little more initial discounting, for remarketing
purposes the A320 fleet is effectively divided into two.
Fortunately, both engines each enjoy a substantial market base,
hence the negative impact of the split is not too severe.
Staying with the engine selection, a few versions seem less
preferable. The well-publicised problems with the initial
IAE V2500-A1 negatively stigmatised this version despite
successful attempts by IAE to improve the performance of the
-A1 with the so-called Phoenix kit. With the -A1 fleet largely
concentrated by two big operators in India and Mexico, the
future of the -A1 powered fleet is at best uncertain. While the
V2500-A5 has been performing well in general, recently a small
sub-fleet of this engine type encountered a problem. It seems
a number of A5’s operated by airlines in India have started
to developed stress-cracks in a section of the high pressure
compressor, most likely because of the interaction of certain
chemicals in the local environment with certain metallic parts
in the engines. IAE has worked out a structural solution –
the replacement of some parts. For those engines that do not
have any cracks, a special cleaning action is required. Once
implemented it should not have any long-term impact on the
value or ability to finance the aircraft.
While IAE had its -A1, CFMI had its double annular
combustor (DAC) as its somewhat stigmatised engine. The DAC
was CFMI’s answer to the request from some Northern and
Central European carriers for an ultra-clean engine to reduce
environmental charges imposed by the local governments.
While the DAC clearly met that requirement, it came at the
expense of slightly higher operational costs. Bankruptcies of
the original operators released a number of DAC to the market
and financiers were confronted with negative reactions from
potential new operators, either for real reasons or as leverage
in the negotiations. This experience created a bad name for
the DAC. The DAC can be converted to normal single annular
combustor (SAC) status by swapping the engine core however,
this requires a significant investment.
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STEP CHANGES IN TECHNOLOGY
Engine technology has evolved since the A320-200’s first
flight over 23 ago. While there is a clear difference between
the 737 Classic and the 737NG, there is no sharp distinction
between early and late A320s. One differentiator that is used
by financiers is to call CFM56-5A powered aircraft ‘A320
Classics’, contrasting them from the more modern -5B powered
aircraft. There is a trend that increasingly discriminates the
older -5A powered aircraft as less desirable for financing.
Both CFMI and IAE continue to improve their products. The
first generation CFM56-5A was succeeded by the -5B and later
the -5B was improved with a new 3D Aero package. In mid-
2007, CFMI introduced a tech insert upgrade, which includes
changes to the high-pressure (HP) compressor, combustor, HP
turbine, and low-pressure turbine nozzle. These have been
designed to improve fuel burn and durability, increase time on
wing, and give the engine more margin over CAEP 6 emissions
levels. New tech insert components can be installed at engine
overhaul except for the combustor and tech insertion has
now become the production standard. The CFM-56-5B/P is
available at various thrust settings, ranging from 21.6 Klb (B8)
to 33 Klb (B3). A ‘bump’ version for ‘hot and high’ airports is
also available.
In response, IAE also introduced an engine upgrade for their
V2500-A5, dubbed SelectOne. The upgrade includes high and
low-pressure turbine improvements, an upgraded compressor,
a new variable stator vane system, and new engine control
software. IAE claims up to one per cent lower fuel burn and 20
per cent longer time on wing from the upgrade. On October 1,
2008, the V2500 SelectOne upgraded new engine entered into
commercial service with its launch customer. The V2500-A5 is
available at various thrust settings, also ranging from the 22.0
Klb V2522-A5 to the 33 Klb V2533-A5. A bump version for hot
and high airports is also offered on specific V2500 versions.
Financiers generally prefer aircraft with higher thrust engines
as the cost of an engine thrust upgrade during remarketing
can be avoided and lower thrust settings do not require
additional cash. For the same reasons, financiers prefer higher
MTOW variants. It should be noted that extreme thrust levels
or MTOW’s (needed for a few market niches only) do not
add much additional value. The A320-200 is available with
MTOW’s ranging from 66,000 to 78,000 kg., with the basic
MTOW 73,500 kg. Extra range can be obtained by adding one or
two additional centre tanks (ACT) of 3000 litres each.
While most of the niche aircraft are so-called because of
engine-related issues, for a small group of A320s it is because
of the airframe. This group consists of a sub-fleet of A320s
operated in India – the so-called ‘double bogies’. To lower the
runway loads, these aircraft are equipped with four-wheeled
main landing gears as opposed to the standard two-wheel main
gear bogies. It is thought unlikely that these aircraft will ever
leave the Indian register.
More recent A320s feature product improvements such as
LCD instead of CRT monitors in the cockpit, upgraded and
lighter interiors as well as aerodynamic improvements (new
pylon shape, redesigned belly fairing etc.). None of these
improvements has yet seriously affected the acceptability of the
previous designs regarding financing.
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Like the A320, asset based financiers prefer the more
range-capable A321-200 to the A321-100 (of which only
81 were produced). The A321-200 features structural
reinforcements, a higher weight schedule, and provisions for
additional center tanks. While initially there was a structural
difference between the A321-100 and the A321-200, it is our
understanding that as of the manufacturer’s serial number
(MSN) 633, all -100 aircraft are effectively low MTOW -200’s
and a (paper) upgrade to -200 levels is possible. The original
-100’s lacked the range for US coast-to-coast operations. While
the A321-100 has all characteristics of a niche aircraft, the
-200 (although not as remarketable as the A320-200) enjoys
a sizeable market base. From that viewpoint, it can still
claim superiority over its (much younger) opponent, the 737-
900/900ER. The A321-200 is offered with MTOW’s ranging
from 89.000 to 93.500 kg., with the basic MTOW 89.000 kg
although some airlines are known to operate lower MTOW
to benefit from reduced landing and navigation charges. Up
to two ACT’s are optional. There are also a small number of
DAC-powered A320s.
The second most popular member of the family is a simple
shrink from the baseline A320. The operator base is split
between CFM56 and V2500-A5 operators. Apart from some
DAC powered planes, the A319 has relatively few problem
variants. A wide range of operators, from traditional network
carriers to LCC’s and even corporate and private jet operators
use the type. The A319 is well-suited to asset based finance,
albeit some of the older -5A powered aircraft may be ending
up at second or third tier airlines as result of the current
market downturn. For transactions involving well-maintained,
standard specification A320s there seem to be few things
that can go wrong — as long as realistic valuations and value
projections are assumed. The A319-100 is available with
MTOW’s ranging from 64.000 to 75.500 kg. and up to two
ACT’s are optional.
Last and least is the A318. The double-shrink A318 is the
problem child of the A320 family in terms of market acceptance
and the ability to remarket. With 100-110 seats, the A318 is
effectively a competitor to the big regional jets, such as the
E190 and E195 and to a lesser degree the CRJ900 and 1000.
As always, a shrink version and especially a double-shrink
version suffers from an over-dimensioned heavy structure,
which seldom results in an efficient aircraft. The 737-600
suffers from the same problem. The A318-100’s MTOW ranges
from 56.000 to 68.000 kg. While not as efficient as the stretched
super-regionals, the main advantage the A318 had to offer was
its commonality with the other family members. While the
engines powering larger members of the family are obviously
too heavy for the little A318, offering a more optimised engine
type would jeopardise the important commonality benefit.
Airbus decided to offer both options: Airlines that already
operated CFM-powered aircraft and preferred the commonality
element could select a CFM56-5B8/9 powered A318, while
airlines preferring an optimised power-plant could select the
Pratt & Whitney PW6000 engine developed uniquely for the
A318. Unfortunately, no commonality could be offered with
V2500 powered aircraft.
With the A318 already a slow seller, development problems
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for the PW6000 delayed introduction of that engine
substantially and the CFM56 became the preferred engine
for the A318. Currently, the PW6000 is only operated by one
airline, which makes the combination rather unique but at the
same time, unsuitable for asset-based financing. Recent market
experience has proven that, at least for as long as the current
downturn lasts, even a relatively young CFM56 powered A318
could not be sold for prices that exceed the break-up value
of the aircraft, or rather the value of its engines. From that
perspective, the CFM powered aircraft at least have another
edge over the unfortunate PW6000. With new technology
geared turbo fan (GTF) replacement technology on the horizon,
it remains to be seen if the PW6000 story will ever have a happy
ending. For the time being our conclusion has to be that the
A318 does not make a popular asset from a financier’s point
of view. The A318CJ corporate jet version does have a certain
popularity in the corporate jet market.
VALUES AND RISKS
With its production history spanning over 20 years, the
A320 is an ideal aircraft to track long-term aircraft value
dynamics. Interestingly enough, since the first A320-200s
were delivered in 1988, the ‘historic’ current market values
(as reported by appraisal firm Ascend) have largely fluctuated
with the ups-and-downs of the market, without much of a
clear upward or downward trend. This is indicated by the
almost horizontal trend-line in the value graph above. While
these appraised value figures are not the same as the net
flyaway prices paid by Airbus’ airline and lessor customers
(a carefully kept secret), they should give a good indication
about the price dynamics of a new A320-200. So, while
Airbus and the engine OEM’s have improved their products
significantly over the last two decades, the price has stayed
fairly flat with fluctuations largely driven by the condition
of the market. For an asset based financier this is important
to keep in mind. It must be said that the A320 was launched
some years after the era of hyperinflation. Should inflation
increase significantly in the coming year as a result of the
billions of dollars injected in the global economy, this could
result in an upward trend for new aircraft prices as well.
It should be taken into account that the above is not to be
confused with the so-called escalation clauses in airline
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purchase contracts. These escalation clauses do increase the
net flyaway price of the aircraft between the date of signing
the contract and the date of delivery. This mechanism can in
some cases result in delivery prices, significantly exceeding
the spot market, especially in case of long lead times.
Historically, used A320 values have fluctuated slightly more
than 737NG values. While Airbus is occasionally accused
of a more aggressive pricing policy, allegedly resulting in
significant discounts, it is unlikely to be an explanation for the
higher volatility. Because the A320 was launched long before
the 737NG the A320 has lived through more downturns. As a
coincidence, a number of A320 operators defaulted during the
post 9/11 crisis while most of the 737NG operators survived.
Consequently, a higher number of A320s faced distressed
market circumstances compared to the rival 737NG. While
asset base financing is focused on the aircraft, the quality and
concentration of the operator base does play a role. As history
has proven, a high fleet concentration with one or more weaker
  particular. Asset based financiers will find this development
  With respect to the eventual successor for the A320
airlines increases vulnerability of the type.
There are a number of significant fleet concentrations,
both for the individual types and the collective family.
A thorough analysis of the default probability of any of
the major operators should be a part of due diligence,
even for an asset-based financier.
The current surplus of A320 Family aircraft (as
represented by the fleet percentage ‘in storage’) is relatively
modest – as is to be expected for a modern, liquid single aisle
aircraft. While a little over 11 per cent of the entire Western-
built jet fleet is in storage, the highest storage of any series
within the A320 Family is for the A320 with only 3.8 per cent
(according to Ascend online, August 2) — not bad for a type
that has been in production for over 20 years. The storage
percentages for the A319 and the A321 are also negligible.
42
THE FUTURE
Based on statements from both Airbus and Boeing, it seems
that production of the A320 and 737NG could continue
until the end of the next decade. Both manufacturers have
indicated that current technology, in particular engine
technology, will not bring the required gains in operational
cost for a new generation of mainline 150-seater aircraft
required to justify the launch of a successor. Will this mean
that technological improvements to the A320 will only be
evolutionary? Airbus already introduced the CFM-56 Tech
Insert and V2500 SelectOne engines, improved aerodynamics,
and will soon add a redesigned upper-belly fairing. At the time
of writing, another potential aerodynamic improvement was
being tested — a set of larger NG-style winglets. For existing
A320 operators, it will be important to learn which of these
improvements can be retrofitted, especially given the upward
trend in fuel prices.
The prospect of a more or less radical mid-life update is
causing much speculation. The main feature of the assumed
update would essentially comprise the re-engining of the
existing airframe. While none of the incumbent airframe and
engine OEM’s in the 150-seat market have a real incentive
to push this, Pratt & Whitney has much to gain and has
developed the GTF with the clear intention to regain lost
ground in the market. P&W’s GTF, now called the PurePower
PW1000G , is already on board the smaller CSeries, the
Russian MS-21, and the MRJ. It seems the Chinese narrowbody
programme, the C919 will select the CFMI LEAP-X. .Both
Airbus and Boeing have announced they are studying
programmes to equip their existing airframes with the new
CFMI and/or PurePower engines. While no immediate impact
on the existing A320 fleet is expected, should a significantly
more efficient GTF or LEAP-X powered A320 or 737 become
a reality, it will probably have consequences for future
values of existing aircraft, and late-built A320s and 737s in
worth watching as despite protestations to the contrary from
interested parties, the potential damage to future values of
existing portfolios is significant. Previously similar step-
changes in engine technology were applied to create the
737NG from the 737 Classic aircraft family and so the market is
not unfamiliar with the practice.
(frequently referred to as a ‘game-changer’), very little seems
clear except that we are unlikely to see this aircraft in the air
before 2020. Current thinking is in terms of a greener, more fuel
efficient, quieter aircraft with lower maintenance costs. Radical
designs like a small twin-aisle, a lifting blended-wing body and
open rotor engine technology also cannot be excluded.
Less in the realm of science fiction is the future of the A320
and A321 as a cargo aircraft. Airbus Freighter Conversion
GmbH, a JV between EADS-EFW and UAC-Irkut, is developing
a passenger-to-freighter (P2F) modification programme for
the A320 and A321. Certification of the cargo conversion
is expected by the end of 2011 for the A320 and end of 2012
for the A321. The project found a launch customer at the
Farnborough Air Show in 2008 when Aercap announced
an order for 30 conversions for its own portfolio of A320s.
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Unfortunately, the development of the project coincided

with one of the worst downturns in the cargo market and
cargo operators seem more focused on survival than on fleet
renewal, let alone expansion. Competing in a market used to
Boeing narrowbody freighters, the A320 will have a tough job
establishing itself. Clearly, the A320 will offer more modern
technology as well as a larger fuselage cross section plus
significant belly cargo volume. As a side effect of the current
crisis, feedstock passenger A320s and A321s may become
affordable for conversion sooner than anticipated. From a
financier’s point of view the availability of an afterlife in the
cargo market is without any doubt a strong positive element
when analysing a commercial jet..Such programmes have engine segment can be viewed negatively compared to the
traditionally improved re-marketability and had a positive competing 737NG, the absolute size of both segments is such
effect on residual values. Many investors have come to view the that the impact on financing is minimal. The value history
availability of a cargo conversion project as an insurance policy of the A320 confirms its suitability for financing. The main
for early-build aircraft. uncertainty for the A320 Family seems to be the timing of
The majority of A320 Family members are among the most the service-entry of any successor models. While Airbus has
liquid commercial jets in the current market. From an asset implied this will be post-2020, the possibility of a new engine
based financier’s point of view, the A319, A320 and A321 are option (NEO) for the A320 Family remains the subject of much
among the most attractive aircraft types. The A318 clearly falls speculation.
outside of this category. Despite this, a number of ‘odd ball’ Whatever final decision materialises, a radical open-rotor
A320 members will generally be avoided by financiers or will powered lifting body or a simple conventional re-engining,
only be considered under very conservative terms. In addition, it will be a challenge for Airbus to create an aircraft that can
early-built A320 Classics no longer command the confidence of exceed the attractiveness of the A320 for the air finance
most financiers. community. It will take a long time before that aircraft will also
While the division of the A320 fleet into a CFM and an IAE be referred to as a ‘no-brainer’. ■

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