January 20, 2016 / 1:25 PM / 4 years ago

AerCap plays down fears of price war over big jets

DUBLIN (Reuters) - The head of one of the world’s biggest aviation fleets played down the risk of a price war over big jets like the Boeing 777 on Tuesday, saying its U.S. manufacturer would rather sacrifice production than risk damaging its own portfolio.

A Boeing 777 jetliner being manufactured on the production line at Boeing's Commercial Airplane manufacturing facility in Everett, Washington February 14, 2011. REUTERS/Anthony Bolante

Aengus Kelly, chief executive of AerCap, the world’s largest independent aircraft leasing company, told Reuters that Boeing would avoid reckless pricing of the current model in order to shield sales of the 777X, now in development.

“If Boeing do deliver 777s at deeply discounted prices, they could cannibalize 777X sales. They would be borrowing from the future,” Kelly said in an interview.

“If demand isn’t there and they have to drop the price precipitously to sell, then my view is they won’t do it and they will instead cut production,” he told Reuters.

Boeing, which has acknowledged the possibility of cutting production of the current 777 without yet taking a decision, was not immediately available for comment.

Kelly’s remarks during a gathering of aircraft financiers in Dublin came on the heels of warnings about tumbling values of some wide-body jets as older models get phased out. Resale prices of old jets affect new prices and lease rates.

Delta Air Lines Chief Executive Richard Anderson said last month his airline had signed a tentative deal to buy a used Boeing 777-200 for $7.8 million, a fraction of the new price and well below most estimates for 10-year old jets.

The news hit shares of both Boeing and Europe’s Airbus and provoked protests from some in the industry, who said warnings over Anderson’s deal were exaggerated.

Kelly acknowledged some prices had fallen, especially those for 777s powered by Rolls-Royce, after jets owned by bankrupt Transaero and Malaysia Airlines washed onto the market.

But he said Delta’s bargain was only part of the story and might not reflect the whole value of the deal to the seller.

“The seller of that plane will have recovered about $40 million for the one Delta quoted, because it would keep all maintenance reserves and security deposits,” Kelly said. Such reserves contain money set aside for regular overhauls.

“The seller would have pocketed $30 million or more and Delta can sell it for scrap for $8 million. We move two wide-bodies every week and when we sell a 777-200 we get over $40 million for a similar aircraft.”

Most recent 777s are powered by General Electric. Financiers said there were fewer signs so far that these were suffering the same market weakness.

Editing by Katharine Houreld

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