1. Home
  2. VIEWPOINT
  3. Hourly cost mx programs & aircraft value
0

Hourly cost mx programs & aircraft value

82
0

Understanding how hourly cost maintenance program coverage affects an aircraft’s value


Many operators view HCMPs as a justifiable investment.
An aircraft owner recently examined the current value of their asset on eValues (Asset Insight’s automated valuation system), and they were surprised to learn how much impact Hourly Cost Maintenance Program (HCMP) coverage had on their aircraft’s value.

The owner called us to understand why. Anyone whose aircraft has undergone a major engine maintenance event knows how valuable HCMP coverage can be, and that issue alone has made HCMPs a justifiable investment for many operators.

The impact of HCMP coverage on an aircraft’s value is not linear throughout the asset’s life, nor does it follow a standard valuation formula for all models.

There are, however, some standard practices and concepts that many appraisers follow to determine the value impact of HCMP coverage.

Program transferability and term

The primary determinant of an HCMP’s value is transferability. While there are many benefits associated with HCMP coverage enjoyed by an aircraft’s current operator, whether or not a program is worth anything is directly tied to its benefits transferring to the next owner.

There is zero value associated with an HCMP that is not transferable. In addition, a program’s term must be renewable, or at least extendable, to create value for the asset.

Model fleet enrollment

Market research has revealed that many aircraft take longer to resell absent HCMP coverage. Since aircraft are depreciating assets, this could mean a substantial loss in value.

Another major value influencer is the percentage of a model’s active fleet enrolled in HCMPs.

If only 10% of a model’s fleet is enrolled in an engine HCMP, coverage will likely add less to the aircraft’s appraised value than if 80% of that model’s fleet is enrolled in a program.

On the other hand, if 80% of your model’s fleet is enrolled in an engine HCMP and your aircraft is not, your asset may sustain an appraised value decrease. You should also consider an indirect influencer to value from HCMP coverage.

In a market where prices are falling rapidly, an extended remarketing period may cost more in terms of the asset’s depreciation than the in-service aircraft buy-in fee would have cost.

Moreover, if a large percentage of the fleet is enrolled in an engine HCMP, an aircraft’s lack of coverage may lead to offers that affect value negatively in excess of the buy-in fee.

Aircraft age

A 5-year old aircraft listed for sale may enjoy an appraised value increase by virtue of engine HCMP enrollment that is equivalent to its then current program enrollment fee, assuming a majority of that model fleet is covered by an engine HCMP.

However, the appraised value effect of program coverage would be far lower than the asset’s buy-in fee if the aircraft was 25 years of age. For example, let’s assume an average transaction value for a model’s year-of-build is $20 million at age 5, and a specific aircraft has an engine HCMP buy-in fee (at that point in time) of $2 million.

If the aircraft’s market value is $3 million when the asset reaches 25 years of age, and its engine HCMP enrollment fee is $2 million, the aircraft’s appraised value is unlikely to increase the amount of the buy-in fee.

Exactly how much value impact engine coverage is likely to have at any specific asset age depends on numerous factors.

It could, in fact, be zero. However, lack of coverage for an aging asset whose model fleet is largely enrolled in an HCMP could drop an aircraft’s price down to salvage value.

Type of coverage

Not all HCMPs generate the same level of asset value. Historically, engine program coverage has pinned the largest value increase to an aircraft, while avionics-only coverage has had virtually no impact.

Airframe coverage can generate varying levels of value increase, and the figure is often model-specific. APU coverage value is often tied to a percentage of the buy-in fee at the time the aircraft trades.

Level of HCMP coverage

Engine HCMPs offer valuable benefits to new and used aircraft buyers, over and above any increase to the aircraft’s residual value. These benefits are quantifiable and can provide value directly to the owner.

How much of the maintenance cost a specific program covers is another aircraft value determinant. Pro-rata programs cover a portion of the maintenance expense for the first of each scheduled maintenance line item following enrollment.

Once an event has been completed, the next time it is due it is covered by the program. Many operators opt for this level of coverage, as program enrollment provides total unscheduled maintenance event coverage immediately upon enrollment, while requiring no buy-in fee for an in-service aircraft.

However, because the operator must pay a portion of each maintenance event (when the event occurs) based on the time accrued toward that event prior to program enrollment, the appraised value of such coverage is less than that realized by an aircraft that has been enrolled through payment of a buy-in fee.

Additional value considerations

The ultimate value impact of HCMP coverage on any aircraft comes down to what the buyer and seller agree the price to be, and one should not misinterpret the aircraft’s appraised value with what a buyer may be willing to pay for the asset.

For example, paying the engine HCMP buy-in fee for an aircraft you are about to place on the market may not lead to offers that offset the cost of the buy-in fee. However, your aircraft may sell faster – especially if the majority of the model’s fleet is on an HCMP, and none of the other listed assets are covered by an engine program.

There are additional valuable benefits to HCMP coverage that new and used aircraft buyers may not be considering. Such features provide value over and above the increase to the aircraft’s appraised value, are quantifiable, and can provide value directly to the owner. They include:

• Additional coverage while under warranty. Certain related expenses are not covered by warranty, such as the cost for logistical support to address an event occurring far from home.

This could include shipping the affected component to the maintenance facility; shipping a rental component to the aircraft; installing the component; the cost of the rental component during the repair period; removing the rental part once the original component has been repaired; return shipping for the rental component; shipping cost to the maintenance facility for the original component; and the cost to transport and house personnel at an unscheduled maintenance event site.

While warranty coverage is valuable, its value is usually limited to the cost of repairing the affected component.

• Exposure at resale. As discussed earlier, market conditions may require an owner to enroll their aircraft in an HCMP rather than suffer a valuation decrease in excess of the HCMP buy-in fee. While incurring the expense at time of sale, the operator has enjoyed none of the HCMP coverage benefits while operating the aircraft.

• Days on market. Detailed market research has revealed that many in-service aircraft will take longer to sell absent HCMP coverage. This could mean a substantial loss in value, since aircraft are depreciating assets.

• Rental component expense. Many owners fail to account for the true cost of rental components, the potential difference in their travel experience when chartering aircraft, the total cost of charters during the asset’s down-time, and asset storage, as well as other fees for their grounded aircraft.

• Freight and shipping charges. The cost to ship AOG parts, and the freight charges and logistical challenges to transport a component from wherever the event occurred to the service facility, as well as the cost to ship a rental component to the site of the maintenance event, can be substantial and are usually not part of warranty coverage.

• Financing benefits. Each aircraft financing entity has its own methodology for valuing HCMPs – thus, determining the exact value that any one company may place on HCMP coverage is difficult. However, the savings differential over the term of a loan or lease could be substantial.

HCMPs, as their name implies, have a cost to them, and many new aircraft owners believe they are not worth the expense since new aircraft enjoy warranty coverage. However, financial analysis is not on their side (see Pro Pilot, Dec 2017, p 18) and, over time, the odds of optimizing their investment’s value are not favorable.


Anthony Kioussis
President & CEO, Asset Insight LLC

 

 

(82)