Another Bubble Pops: Used Boeing 777 Sells For 97% Off List Price

Another Bubble Pops: Used Boeing 777 Sells For 97% Off List Price

Tyler Durden’s pictureSubmitted by Tyler Durden on 12/27/2015
http://www.zerohedge.com/news/2015-12-27/and-another-bubble-used-boeing-777-sells-97-list-price

While the US economy may have unofficially entered an industrial recession in recent months with the dip in the manufacturing ISM below the critical 50 level, one sector has continued to do surprisingly well: automotive manufacturing, as a result of vibrant car sales. The reason for this, as we have repeatedly demonstrated, has been the record surge in auto loans, which have long surpassed both total credit card debt (and the $1 trillion mark), and continue to fund an unprecedented auto buying spree as they rush to catch up to the $1.2 trillion in total student loans.

 

Furthermore, recent Experian data confirms what most have known: the only reason auto sales are as strong as they are is because for the second time in under a decade, there is a substantial car loan bubble. As noted pbefore, here are some of its key characteristics:

  • Average loan term for new cars is now 67 months — a record.
  • Average loan term for used cars is now 62 months — a record.
  • Loans with terms from 74 to 84 months made up 30%  of all new vehicle financing — a record.
  • Loans with terms from 74 to 84 months made up 16% of all used vehicle financing — a record.
  • The average amount financed for a new vehicle was $28,711 — a record.
  • The average payment for new vehicles was $488 — a record.
  • The percentage of all new vehicles financed accounted for by leases was 31.46% — a record.

 

Still, despite persistently record easy credit terms, the final days of the car loan bubble appear to be at hand: with US auto inventories already at their highest levels relative to sales since 2009 – suggesting US consumers can hardly absorb any incremental auto production – all it would take to pop the bubble, is a small exogenous event: like a rate hike by the Fed.

 

But while the car loan bubble has been extensively documented there is another mode of transportation where the bubble in prices may have easily eclipsed anything seen in the auto space, and which, pardon the pun, has flown right below the radar.

Airplanes.

According to Air Transport World, Delta recently signed a letter of intent to buy a used Boeing 777 for $7.7 million, according to CEO Richard Anderson.

The Delta CEO raised some eyebrows in October when he said there was a “huge bubble” in used widebody aircraft, pricing a 10-year-old 777-200 at $10 million. Anderson said that the market would be “ripe” for Delta to buy used 777s.

To be sure, Boeing president and CEO Dennis Muilenburg was among those who pushed back against Anderson, saying the Delta CEO was valuing used 777’s much too low.

It wasn’t. Although, as it turns out, Anderson was indeed wrong when he said used 777s were on the market for $10 million. “It was actually $7.7 million. We just signed a letter of intent to buy one.

Anderson’s comments came during Delta’s investor day and, for added emphasis, were posted on Twitter by Delta. Just as happened when Anderson made the original remark about used 777 values, Boeing’s stock price immediately dropped.

Here is the punchline: Boeing’s list price for a new 777-200ER is $277.3 million, meaning Delta is buying a used 777 at a price 97.2% lower than the value of a new 777.

Delta did not give details on the 777 for which it signed the LOI, such as who the seller is and which airline previously operated the aircraft.

This stunning “price discovery” leaves a few key questions wide open:

  • Was this just a one off transaction in which Delta found a very “motivated” seller and took advantage of what was beyond a firesale price? If so, who was the seller and why liquidate in such a hurry?
  • Alternatively, if this deal is indicative of prevailing “used plane” market prices, and judging by Anderson’s comment one can find more 777-200ERs for the low price of $10 million, this means that either the market for new plane widebody airplanes is indeed an unprecedented bubble funded by such government vehicles as the Ex-Im bank, or the used plane market is a ticking time bomb for all those billions in EETFs and various aircraft-backed pass through securities which are collateralized by planes such as the the Boeing 777. It explains the stink Boeing made when Ex-Im bank’s charter was temporarily revoked by Congress.
  • At the micro level, if new plane prices are just a “huge bubble” as the Delta CEO alleges, that means that the valuation of Boeing is about as “credible” and sustainable as that of New Century just a few days before the subprime bubble burst.
  • Finally, if there is such a dramatic cliff between new and used airplanes, what does that mean for bank amortization assumptions on billions in airplane inventory which is still carried by banks on their books, and just how massive would be the valuation deficit once loans collateralized by airplane “assets” are marked to market.

Granted, while it is becoming increasingly difficult to track all of the bubbles and capital misallocations that have resulted from 7 years of ZIRP, NIRP and QE, we hope to present readers with some answers to these questions ideally before the serial, or parallel, and long overdue bursting of said bubbles takes place.

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