Boeing 737 Max grounding drives up demand for older models

As the worldwide grounding of the Boeing 737 Max enters its sixth month, airlines are turning to older jets to help meet growing demand, prompting a surge in rental rates.

“Used 800s are like a gold dust at the moment,” said Phil Seymour, CEO of London-based aerospace consulting firm IBA, referring to Boeing 737-800s, an older model of the plane. He estimates lease rates for 24 months or less, for some older 737 planes have gone up 40% to about $300,000 since regulators grounded the planes in March after two fatal crashes within five months of one another. Together the two disasters claimed 346 lives — everyone on board the two planes — and regulators have not said when they will allow the planes to fly again.

Crash investigators have implicated a piece of flight-control software that repeatedly pushed the nose of the planes down in both the Lion Air and Ethiopian Airlines crashes. Boeing is testing a software fix for the planes and expects regulators to allow the jets to return to service early in the fourth quarter, but warned that the date could be pushed back further.

The grounding has left airlines without the fuel-efficient 737 Max planes they were counting on during the busy mid-year vacation season, sending some carriers to pay up for the older models that are less fuel efficient.

The International Air Transport Association, a trade group, this week said air travel demand rose about 5% in the first half of 2019 from a year ago.

Michael Inglese, CEO of leasing firm Aircastle, said some customers whose leases on older 737 jets are expiring are extending their agreements and that the increased demand has been a “modest benefit” to the company. The firm doesn’t have any 737 Max planes or any on order. Inglese said when the planes were first grounded in March customers expected the jets to return to service quickly, but now carriers are debating how to address the prolonged grounding.

“Now it feels there’s a little more decision paralysis,” he said. “Everybody is scratching their head at the moment.”

The Boeing 737 has been a staple of airline fleets for more than 50 years, a single-aisle jet that can fly short- and medium-haul flights and fit more than 150 passengers.

Airlines including Southwest and Brazil’s Gol, that exclusively fly 737s are holding on to older planes longer. Southwest warned investors last month that the grounding would force it to reduce capacity this year instead of the 5% growth it had planned, while Gol said the older, less fuel efficient 737s that it’s keeping in its fleet are forcing it to include a stop in the Dominican Republic on its new routes to Florida from Brazil, which CFO Rich Lark said makes it more unattractive to customers who would be flying nonstop on the 737 Max.

Some leasing firms say they don’t have any 737-800s or other older models to lease, but that hasn’t stopped some airlines from trying.

“Fly has already leased all of its B737s this year so we don’t have any available,” Colm Barrington, CEO of Ireland-based Fly Leasing, said in an email. “Based on airline inquires, we are seeing strong demand for B737-800s in particular, which is likely to be reflected in higher re-lease rates for the type this year.”

On a July 30 earnings call AerCap CEO Aengus Kelly said that almost all of the lessor’s planes are placed with airlines when he was asked about lease rates.

“So it’s not that we have a bunch of airplanes on the deck, that we can just put up in the air because of the shortage of Maxes,” he said. “So we don’t immediately generate a gain from that per se.”

Boeing paused deliveries of the 737 Max after the grounding and cut production by a fifth to 42 a month. It took a $4.9 billion charge in the second quarter, an estimate of compensation airlines and other Max customers will receive.