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Understanding asset quality

By Anthony Kioussis
President, Asset Insight

It’s been said that beauty is in the eyes of the beholder, and that can certainly hold true for aircraft. Regretta­bly, a nice-looking aircraft may be in worse mainte nance condition than an asset in serious need of repaint­ing, hence the need to objectively understand an aircraft’s Asset Quality.

Asset Quality defines an aircraft’s overall technical con­dition by taking into account everything from its paint to its passenger interior, with focus placed on the asset’s maintenance condition.

The challenge comes in develop­ing and using a grading system able to objectively ana­lyze all aircraft on a standardized scale.

Asset Insight’s methodology

At Asset Insight we use 2 parameters to grade an aircraft’s Asset Quality: Maintenance Rating and Financial Rating. Maintenance Rating objectively evaluates and grades an aircraft’s maintenance status relative to its Optimal Maintenance Condition (the asset’s maintenance condi­tion on the day it came off the production line), utilizing the aircraft’s (standard/typical) Scheduled Maintenance Program.

The Maintenance Rating scale, and what the figures represent, is detailed in Table A. To derive the Maintenance Rating for any aircraft make/model, several variables, particularly the Sched­uled Maintenance Program established by the aircraft’s manufacturer and/or other regulatory authority (eg, the Federal Aviation Administration) must be compiled, and a frequency must be established for specifically identi­fied Scheduled Maintenance events.

For items that do not have specific service life (replacement) limitations, a Ser­vice Life figure must be established based on that com­ponent’s projected average failure rate. Once a specific aircraft’s maintenance history has been compiled, it is compared against its Make/Model Maintenance Program to determine its Maintenance Rating.

The Maintenance Rating scale ranges from –5.000 to 10.000. This scale includes negative numbers as opera­tors may be able to exceed the Service Life figure established for components that don’t have specific service life limitations

One must also remember that OEM mainte­nance events often have “recommended” service inter­vals that someone operating an aircraft under Part 91 may not need to follow.

Table B provides an example of how the Maintenance Rating would be derived for a theoretical aircraft that has only 7 maintenance events.

Sum of the Remaining Useful Life for the events is 350%. When divided by the total number of events (7), the Average Remaining Useful Life is 0.500.

Based on the Asset Insight scale, this equates to a Maintenance Rating of 5.000. From a Maintenance Rating perspective, this is an average aircraft. We must now compute the aircraft’s Financial Rating, which is the aircraft’s Scheduled Maintenance event costs based on its Maintenance Rating (Table C).

The aircraft Financial Rating evaluates and grades an aircraft’s financial condition relative to its Optimal Main­tenance Condition, meaning the aircraft’s Maintenance Rating is weighted by the estimated cost to complete each maintenance event.

Unlike the Maintenance Rat­ing scale, the Financial Rating scale ranges from 0.000 to 10.000 since a maintenance event should cost the same whether it is completed on time or later than the OEM’s “recommended” service intervals.

Some might argue that it could be more expensive to complete an event when exceeding the OEM’s service interval.

The question that is too subjective to answer is how much more expensive? So in order to maintain objectivity, the cost figure must remain the same. To derive the Financial Rating for any aircraft Make/ Model, the average cost to complete each aircraft event under its maintenance program must be determined.

Having compiled the aircraft’s maintenance history, the time (calendar, flight hours or cycles) accumulated to­ward each individual scheduled maintenance event is used to determine its Financial Rating.

Table D calculates the Financial Rating for the same theoretical aircraft that has only 7 maintenance events.

While the aircraft’s Maintenance Rating equated a 5.000, its Financial Rating is actually higher, as the aircraft has more Remaining Useful Life relative to its higher cost maintenance events.

Having derived the Maintenance Rating (5.000) and Financial Rating (6.287), the aircraft’s Asset Quality Rat­ing is calculated by averaging out these 2 figures.

Listed on Table E is an explanation of how this aircraft’s Asset Quality (5.643) would be interpreted utilizing the Asset Insight scale (whose range is –2.500 to 10.000).

Based on its Quality Rating, this aircraft is rated as “Outstanding.” For aircraft buyers, the Asset Quality Rating provides an objective approach to quantify the difference in aircraft maintenance condition, thereby helping them determine if they wish to pursue this asset as opposed to another aircraft.

If the aircraft is determined to be desirable, com­puting its Maintenance Equity would provide the final parameter a buyer would need to structure an offer that is financially sensible and objectively justifiable (see Pro Pilot, January 2018, page 12).

For sellers, understanding “where” the Quality Rating places their aircraft relative to competing models provides the ability to judge if an offer is appropriate. Furthermore, rather than refusing an offer for their asset, understanding its Quality Rating can help a seller objectively explain to a buyer why their aircraft is worth more.

Buyer and seller may still not reach a deal, but whoever has the facts at hand is bound to make the more convincing argument and generate the best value from a transaction.

Anthony Kioussis is President of Asset Insight, which offers aircraft valuation and aviation consulting services. His 40+ years of experience in aviation includes GE Capital Corporate Aircraft Finance, Jet Aviation, and JSSI.