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Understanding how Asset Quality affects value of an aircraft offered for sale

By Anthony Kioussis
President, Asset Insight

You may be considering replacing your aircraft. How will its Asset Quality affect the value? Asset Quality summarizes an aircraft’s overall technical condition by taking into account everything – from the condition of the aircraft’s paint to its passenger interior – while principally focusing on the aircraft’s maintenance condition.

Why? Because Asset Quality is the 3rd most influential metric when it comes to an aircraft’s valuation, preceded in importance only by the asset’s existing utilization (flight hours and cycles) and age. However, of the 3, Asset Quality is the only metric an owner can control once it’s decided to replace the aircraft.

An aircraft’s accumulated flight hours cannot be rolled back, and a near-term reduction in flying will have no substantive effect on value. Conversely, if the aircraft has been underutilized, the owner is likely to realize little, if any, additional value, although their aircraft may experience greater market appeal and possibly sell faster, thereby realizing less depreciation.

Similarly, age is an established metric that cannot be altered, and the longer the owner holds on to their aircraft, the more this factor is likely to negatively impact their asset’s value. Asset Quality, on the other hand, is arguably both an aircraft’s greatest “wild card” (since an unscheduled maintenance event can, by definition, occur at any time) and the only metric an owner has the ability to control in ways that can favorably impact the asset’s value.

For example, prior to placing the aircraft on the market, the owner may elect to repaint it, refurbish the interior, enroll the aircraft on an Hourly Cost Maintenance Program, and/or complete maintenance earlier than necessary. All such actions would improve the aircraft’s Asset Quality and its value.

The obvious question is “by how much?” To address that question, we must employ an objective, standardized process able to grade every aircraft on the following 3 parameters (see article entitled “Value optimization – the new market dynamic” in Pro Pilot, Sep 2014, p 10):

1. Maintenance Rating: the aircraft’s maintenance status compared to its “optimum mx condition” (achieved on the day the aircraft came off the production line).
2. Financial Rating: the aircraft’s scheduled mx event costs based on its Maintenance Rating.
3. Maintenance Equity: the difference between an aircraft’s Maximum Available Maintenance Equity value (achieved the day the aircraft came off the production line), LESS the maintenance value consumed through utilization (due to flight hours, landings, or calendar time), PLUS any scheduled maintenance that has been completed.

Accordingly, as an aircraft is utilized, Maintenance Equity decreases. As scheduled maintenance is completed, Maintenance Equity increases. See article entitled “Maintenance Equity” (Pro Pilot, Aug 2015, p 76). Averaging the first 2 parameters derives the aircraft’s Asset Quality Rating and (due to the Rating’s standardized scale) allows us to directly compare any 2 aircraft based on their specific maintenance program.

Deriving the Maintenance Equity (see Table A) allows us to translate each aircraft’s Asset Quality Rating into a financial figure we can use to adjust its Current Market Value. To derive an aircraft’s Maintenance Equity, the estimated cost to complete each maintenance line item required by the aircraft’s maintenance manual must be calculated.

Having compiled an aircraft’s maintenance history, the time (flight hours, landings/cycles, and/or calendar period) accumulated toward each individual scheduled (upcoming) maintenance event is used to compute the dollar value of maintenance (equity) the aircraft still has available.

Table B exemplifies the Asset Quality for an aircraft whose maintenance schedule has only 5 line items. While not realistic (turbine aircraft maintenance often includes hundreds of line items), the table simply demonstrates how Maintenance Equity is computed.

Strictly speaking, Paint & Interior are not items listed in the aircraft’s maintenance manual. However, they do constitute part of the aircraft’s Asset Quality, with their Economic Life measured in months. Further, while Paint or Interior for a specific aircraft may be technically acceptable, styles become dated – hence the passage of time is a life limiter.

The Maintenance Equity for the aircraft in Table B is $13,362.75 below the model’s Average Maximum Available Maintenance Equity of $26,375 (half of the Maximum Available Maintenance Equity figure). Therefore, if the average aircraft value for this model is $X, the value for this aircraft (all other factors being equal) should be $X minus $13,362.75.

Of course, all this is moot absent a willing buyer, but this example allows such a buyer to justifiably offer a lower than average price for this aircraft based on its Current Maintenance Equity. In fact, many buyers are likely to assess a further decrease to the aircraft’s value due to the “time and trouble” they will experience upon acquiring this asset (due to loss of use while maintenance is performed).

Rather than entertaining lower offer prices while concurrently sustaining value loss by virtue of increased marketing time (Days on Market), the seller could complete some of the maintenance due prior to listing the aircraft for sale. For example:
• The seller could repaint the aircraft and refurbish its interior – potentially securing an appraised value increase equal to 40% to 60% the cost of such work.
• Since Event 5 only has 30.6% of its economic life remaining, the seller might consider completing it early, as any savvy buyer is likely to discount the Event’s remaining value as part of their “time and trouble” reduction.

From an appraised value perspective, Scheduled Maintenance event completions normally recover between 60% and 100% of their cost at time of completion.

Completing these 3 events would add $30,508 to the aircraft’s Maintenance Equity, increasing the asset’s appraised value between $18,305 and $30,508 (60% to 100% the value of the completed work) while concurrently increasing its Asset Quality Rating relative to other aircraft and making it more appealing to most buyers.

The seller is also likely to decrease the asset’s Days on Market that, in a quickly depreciating environment, could equate to some additional value retention thereby offsetting the invested maintenance cost. Lastly, the aircraft could be enrolled on an Hourly Cost Maintenance Program, thereby recovering the value of time used on certain major aircraft sectors, such as the engines or the APU (see article entitled “Hourly Cost Maintenance Programs are more valuable than you may think,” Professional Pilot, Dec 2017, p 18). While further increasing most aircrafts’ market appeal, appraised value would be favorably impacted based on the specific figure attributed to the make/model.

The key to securing the highest possible return on your aircraft investment, under any market environment, is establishing an objective methodology that measures and justifies your aircraft’s Asset Quality. It is the only metric under an owner’s control able to translate subjective descriptions – such as “good” or “bad” – to a financial figure that can favorably impact the asset’s value.

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.