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Maintaining objectivity in a subjective world

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By Anthony Kioussis
President, Asset Insight

Average life expectancy of a paint job is 7 years. Offer prices will adjust to compensate for repainting poor or oudated paint schemes.
We occasionally receive telephone calls that start with (what we call) the famous 4 words: “This can’t be right.” The caller then proceeds to explain why the figures displayed by eValues, our automated val­uation system, do not match their view of the world, and the implied – if not stated – expectation is that we will correct the transgression.

Knowing the artificial intelli­gence program running eValues is not infallible, we try to listen very carefully to ensure we understand the caller’s issue. We then point out the objective path that led to our system’s conclusion. Most people understand that an automated system looks at everything with complete objectivity, yet some clients cannot help but “feel” that our conclusions are wrong.

Feelings are fine. The problem is they provide a subjective viewpoint. Our goal is to minimize subjectiv­ity to the maximum extent possible, and we have pro­grammed eValues to think the same way. Subjectivity is a very slippery slope that an appraiser can follow to an unsupportable conclusion. We know. We have encoun­tered some of these folks during expert witness testimony and their “feel” did not serve them, or their clients, well.

Take, for example, aircraft exterior paint. The Asset In­sight Maintenance Rating scale ranges from –2.500 to 10.000, and the rating for new paint objectively depre­ciates to 0.000 over 7 years. Why? Because in speaking with numerous paint facilities, that has been the average life expectancy of aircraft paint and styling.

The paint on any specific aircraft could (and many times does) exceed 7 years of service, but odds are that a buyer will adjust their offer price for the cost to repaint the aircraft if its paint looks marginal, or if the paint scheme is dated.

We once had a discussion with an owner who believed his aircraft’s paint should be rated at an 8, even though more than 15 years had elapsed since the aircraft was last painted, because the aircraft had been kept in a hangar.

Well, the aircraft didn’t do any of its flying inside of the hangar, but it certainly experienced the elements that af­fect paint, such as rain, sleet, hail and UV rays from the sun each time it flew a mission. Next is the issue of an aircraft’s interior condition.

Again, there are those who will rate their aircraft’s interior much higher than the 0.000 it achieves when it has aged more than 8 years. The interior’s condition could be good, but styles change, and interior colors and schemes become dated.

The colors that were prevalent some years ago are probably out of fashion today, and even the TV monitors may need to be replaced with high-definition units. Notice that we are not suggesting that the paint was peeling, the interior fabrics were torn, the leather was worn, or the wood on sidewalls and table-tops was dam­aged.

In fact, the paint and interior may be perfectly ac­ceptable to the current owner and the prospective buyer. However, unless transaction prices allow us to value the asset higher, the only objective basis that intelligence, hu­man or artificial, can rely on is the facts.

Another client valuation angst is the market deprecia­tion pace of cockpit and passenger cabin “technology,” which is often valued lower than some people “feel” it should be. What many are not considering is the pace of technology obsolescence.

Avionics manufacturers, along with cabin communication system OEMs, are introduc­ing new equipment every few years. Considering capabil­ity and dependability – not to mention safety – improve with each iteration, values of aircraft not equipped with the latest technology can depreciate more rapidly than “feels” fair. But is that not to be expected?

Consider a scenario where you install a new avionics suite after its technology has been available for some time. A couple of months later a more advanced system is introduced, and many aircraft owners adopt it for the make/model aircraft you operate.

While perhaps unfair, sellers of these newly-equipped aircraft are likely to ex­pect more (and buyers are likely to pay more) for those assets, at the expense of aircraft equipped with your less capable system.

One item with the potential to dramatically alter an aircraft’s value is Hourly Cost Maintenance Program (HCMP) enrollment, and the amount of value change can be influenced by several factors, and the specific level of coverage the program provides is certainly an important one.

More than one level of coverage is often made avail­able by the OEM, and there are independent companies offering such programs with differing levels of coverage. Another important factor is a program’s transferability.

If it cannot be transferred at time of sale, the program holds no value for the purchaser. However, the primary HCMP value driver is the actual differential between what buyers are willing to pay, by make/model, for aircraft enrolled on HCMP compared to those not enrolled on a program.

Also, if only 20% of your make/model fleet is enrolled on a program, don’t expect the value increase to be dramatic. On the other hand, if 80% of your make/model fleet is enrolled on a program and your aircraft is not, expect a value deduction on your asset. Why? Because your aircraft’s specification relative to HCMP coverage is clearly not preferred by most buyers.

You may find a buyer who does not wish to acquire a HCMP-covered aircraft, just like you may find a buyer willing to acquire an aircraft sporting an outlandish paint scheme. However, rest assured, if they are an expe­rienced buyer, their offer will more than likely reflect your asset’s HCMP coverage status.

By way of seeking an increase in their aircraft’s valuation, some HCMP-covered aircraft owners point to the higher Ask Prices often sought by sellers whose aircraft are enrolled on a specific level of HCMP coverage. Re­grettably, higher Ask Prices do not always translate into higher Transaction Values – the only relevant figure when it comes to valuing an aircraft.

Lastly, maintenance condition can be a serious value driver – particularly following a major airframe inspec­tion or engine work. While some owners “feel” that an aircraft’s valuation should increase by an amount equal to the average cost of a major maintenance event, that is usually not possible.

In fact, the value applied to main­tenance events will decrease over time, as will the value applied to the other items mentioned in this article, in­cluding HCMP coverage. As an aircraft ages, there will come a time when an engine overhaul, or even a major airframe inspection, will be more expensive than the aircraft market value.

The asset’s owner may elect to invest $1 million for a double-engine overhaul, and prospective buyers may be­come preferentially fond of this aircraft, but that does not mean a “willing buyer” will be found who will pay $1 million above the $300k to $400k transaction price range achieved by aircraft of this make/model.

Individually, most of these items are likely to have a negligible effect on an aircraft’s value – excepting HCMP coverage. As a group, however, even if only some of them are misinterpreted or computed by “feel,” the con­sequences can be an illogical and erroneous conclusion.

An appraiser’s function is to provide “an opinion of val­ue.” Thus, valuing an aircraft higher or lower for some spe­cific reason is well within their job description, and their purview. At Asset Insight, when computing a figure (except in the case of an eValues calculation), we try to ensure that “reason” is based on objective factors to the maximum de­gree possible, just in case we’re asked to support our con­clusion through expert witness testimony.


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.