Will Boeing Be Sabotaged by a Used-Aircraft Bubble?

Shares of Boeing plunged more than 4% on Wednesday after Delta Air Lines CEO Richard Anderson warned of a bubble in the market for used widebody aircraft such as Boeing's 777. Anderson claimed that because of a glut of used planes hitting the market, 10-year-old Boeing 777-200 series planes were selling for $10 million. That's about a tenth of what a new one would cost after discounts.

A drop in used aircraft prices doesn't harm Boeing directly. However, the implication is that airlines would turn to the used aircraft market in the next few years, rather than ordering new planes. That would cause big problems for Boeing and Airbus.

It's true that prices are falling for used older-technology widebodies. Nevertheless, the damage to Boeing will be minimal.

Too many planes drives down pricesWhile fuel prices have fallen significantly in the past year, most airlines are still focused on upgrading their fleets with the newest, most fuel-efficient airplanes. In the widebody market, Boeing and Airbus are currently meeting this demand by ramping up production of the 787 and A350, respectively.

Singapore Airlines is one of several carriers looking to phase out 777-200 series aircraft. Photo: The Motley Fool.

Airlines are starting to return relatively young A330 and 777 widebodies to lessors (or even retire them) to make room for the new planes. As a result, some used planes are becoming available at bargain prices.

Experts differ widely in estimating the selling prices of these used aircraft. Delta's estimate is at the very low end of the range. A more middle-of-the-road estimate by Canaccord Genuity put the typical price of a 10-year-old 777-200ER at $15 million. Including cabin reconfiguration costs, the total bill could come to $25 million-$30 million. That's still far below the price of a new widebody, but it's not a negligible cost.

Nobody is buying these planes anywayTo some extent, Anderson's revelation about low pricing for used 777-200s (and A330-200s) wasn't news in the first place. Boeing hasn't delivered a single passenger 777-200 (including longer-range variants) this year, and there aren't any outstanding orders. The 235 current-generation 777s on order as of the end of September are all either freighters or the larger 777-300ER.

In fact, the vast majority of the 569 777-200s, 777-200ERs, and 777-200LRs that Boeing built were delivered between 1995 and 2002. There really aren't that many 777-200 series aircraft that are less than 10 years old. And the older the plane, the harder it is to justify the cost of refurbishing it.

New airplanes have major advantagesThe fact that demand for the smaller 777 variants never recovered after the Great Recession also indicates that these planes aren't really competitive with the alternatives. Airlines have mainly opted to buy the larger 777-300ER, which has lower unit costs, or to wait for next-generation 787s and A350s.

Many airlines want the most modern airplanes available. Photo: Boeing.

Obviously, it could make sense to invest $25 million to buy a 10-year-old used 777-200ER even if nobody is willing to pay $100 million for a new one. That said, the capital cost savings from buying used planes comes with significant trade-offs.

First, airplanes become dramatically more expensive to maintain as they age. Second, a used airplane is closer to the end of its useful life, so it would need to be replaced sooner.

Actions speak louder than wordsDelta Air Lines has arguably the best maintenance team of any airline in the world, as evidenced by the airline's low flight cancellation rate. Perhaps for that very reason, it also has an affinity for keeping planes around longer than competitors. This suggests that used 777-200 series aircraft may be attractive to Delta without being desirable in the eyes of other airlines.

It is thus particularly striking that Delta ordered 10 new Airbus A330-300 aircraft two years ago and a whopping 25 A350-900s and 25 A330-900neos last November.All of these planes are roughly similar in size to the 777-200.

Why would Delta have committed perhaps $6 billion to buying new mid-size widebodies if the economics of buying used planes was so compelling? And if it wasn't a no-brainer for Delta to stick with used 777s, why would other airlines with less skilled maintenance operations opt for the used planes?

Delta may well pick up some used 777s in the next few years if it sees growth opportunities in the international market. It could even buy a few just to harvest them for parts. Low prices for these planes could thus be good news for Delta. However, from Boeing's perspective, this issue is just a tempest in a teapot.

The article Will Boeing Be Sabotaged by a Used-Aircraft Bubble? originally appeared on Fool.com.

Adam Levine-Weinberg owns shares of The Boeing Company and is long January 2017 $40 calls on Delta Air Lines, The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.