There has been an active discussion in the comment section on the “Rate 35” post and the relative merits of appraisals and appraisers with respect to the Airbus A320 and Boeing 737NG.
We’ve been involved in the airline business since 1979 and from 1990, when we co-owned Commercial Aviation Report (CAR), have followed the appraisal business. Given the discussion in “comments,” we think a dedicated post is worthwhile.
CAR created the industry’s first commercial appraisal conference in 1990. ISTAT–the International Society of Transport Aircraft Traders–at that time was still largely a small, professional organization, far difference than what it is today.
CAR’s first conference brought together nearly every appraisal company then in existence in the US to compare and discuss appraisals of what was called Enhanced Equipment Trust Certificates (EETCs) and appraisals published by the firms.
At the time, EETCs were a popular method of financing airplanes, particularly for the poorer US airlines. The theory was that several tranches (or levels) of funding “enhanced” the credit protection. The A tranche had the highest level of credit protection, followed by the B and C tranches. EETCs were typically structured at an aggregate 80% loan-to-value (LTV) and the credit rating agencies rated the EETCs on the basis of airline credit, the equipment type and equipment age of the airplanes covered by the EETCs.
In theory, the lenders then were well protected in the event of a default.
This was put to the test in 1991 following the Iraq invasion of Kuwait. But this is getting ahead of the story, so stand by.
The appraisers provided valuations for each of the aircraft contained within EETCs and three appraisers were hired to provide these. It was off these appraisals that the LTV was set.
In that 1990 CAR conference, we ran our own math and showed that appraisals in the sample EETCs selected for discussion varied by 25%-35%–a wide number, we believed that (to skip a lot of discussion) demonstrated that appraisals were as much art as science at the time (and, we believe, to this day). One of the appraisers opined that appraisals would be considered accurate if they were within 10% of each other.
The challenge, of course, is that each appraisal firm has its own methodology in creating appraisals. What was true then and what is true now is that the methodologies meant that some firms tended to put more generous than others. Typically these firms were hired by the airlines floating the EETCs because they wanted to get as much money out of them as possible.
This meant that for new airplane purchases, airlines typically had appraisals well in excess of their actual purchase prices so that the EETCs often funded 110%-125% of their actual purchase price.
For used airplanes, the valuations were also usually generous when it comes to EETCs.
How do appraisers come up with the valuations? There is a lot of detail to this, but on a macro level, they look at the list prices published by the airframe manufacturers (OEMs); they try–usually unsuccessfully–to get the OEMs to tell them some actual sales prices; and they go to their market sources for sales prices on new and used aircraft. Prices used to be included in FAA filings and Department of Transportation filings. The airlines and OEMs got DOT to withhold these prices as commercial sensitive, and when the industry tumbled that we at CAO were reading the FAA filings, getting the numbers and publishing them, the airlines and lessors objected and literally made a federal case out of it. The FAA published a rule-making case in the federal register and, although we put up a good fight (including American Airlines conflicting out our lawyer in the process), we knew we would lose and we did. The numbers were then redacted from all future FAA filings as commercially sensitive.
The absence of the numbers from the FAA and DOT made it all the more difficult for the appraisers to get good values in their research.
Then came the 1991 Gulf War, and ultimately 40% of the US airline capacity went into bankruptcy: Pan Am, Eastern, Continental, TWA, the first Midway Airlines, and several others. Continental and TWA were prolific users of EETCs, particular for older aircraft. All these bankruptcies put the “enhanced” theory to the test and it royally flunked. Aircraft values plunged so precipitously that the 80% LTVs were meaningless protections. The lenders who were supposed to have ample values were burned anyway.
The credit rating agencies over the years have stepped down the LTVs until today EETCs and similar instruments are more in the 50%-60% LTV range on valuations provided by appraisers.
So how do appraisers come up with values today? As noted above, they talk with the OEMs and the market. Airbus and Boeing hold appraiser seminars to discuss the values and virtues of their airplanes.
Over the years Boeing has been particularly effective at this. As we noted in the Rate 35 comment section, Boeing’s 737NG generally rates higher than the A320 in part because it typically has 12 more seats in airline service and it has one engine type to the A320’s two types. It is generally more difficult to place A320 V2500 engined airplanes than A320 CFM equipped aircraft, and lease rates for the V2500 aircraft typically are (today) $60,000-$70,000 less than CFM equipped A320s. This is reflected in the values.
Boeing is so good and forward-thinking for these appraiser meetings that it was already promoting the virtues of the 787 before the roll-out of the the first one.
Airbus over the years had been far behind Boeing in briefing the appraisal community. It has gotten better in recent years, but by then the “damage” had been done.
Another element in 737s being valued better than A320s is the difference in Airbus and Boeing philosophy through downturns. Boeing would cut production and lay off thousands of workers. Airbus would maintain production and the worker levels (since laying off didn’t really save Airbus money under European labor laws). Thus, to sell the A320, Airbus often cut prices–or so Boeing told appraisers, and appraisers independently confirmed. This practice led to an over-supply of A320s and depressed values, appraisers concluded.
Finally, one reader asked whether the appraisers had agendas like the rating agencies did during the lead-up to the 2008 corporate bust in which companies like AIG were triple A rated but collapsed anyway.
As with any industry, there are good appraisers, mediocre ones and not so good ones. Back in 1990, when CAR staged that first conference, there was a widespread belief that some firms were “for sale” to their clients. There was one notorious story that illustrates.
Appraisers, in addition to publishing appraisal books and doing specific jobs, also do what is called “desktop appraisals.” This is when someone is buying or selling an airplane and needs a quick idea what an airplane is worth. Appraisers generally don’t like to do these because a good appraisal required understanding the hours and cycles of the aircraft in question and its place in the maintenance cycle from the last heavy maintenance check or to the next one. These are critical components of doing a good appraisal.
Then there is what is called “Base” and “Current Market Value” appraisals. A Base appraisal is defined as the value of an airplane in a stable market with good supply and demand. A CMV appraisal takes into account an inflated or depressed market and whether there is a supply and demand imbalance. There is today’s price and future pricing as far out as 20 years.
The notorious story involved one appraiser who was called by a potential buyer for a desktop appraisal. The buyer was given one figure. Then the potential seller called, as it happened, the same appraiser and a different, higher figure was provided for the same airplane. Within the community, the appraiser’s integrity was a matter of discussion.
On the EETCs, the same appraisers were routinely used all the time because they were known to give the highest appraisals. This did not infer anything untoward–these were, in our view, among the reputable firms. It’s just that their methodologies were among the more generous. We tended to like the conservative appraisers.
Some appraisers lean toward Boeing airplanes for the single-aisle aircraft, but the A319 tends to be better than the 737-700. Most tend to like the A330 better than the 767; and all like the 777 over the A340. They are still feeling their way on the A380 but generally don’t favor the airplane because of limited remarketing potential and low launch customer pricing.
So here is a long-discussion of the appraisal community and how they do their work.
Many thanks, very much appreciated, and very interesting to an industry outsider like me.
Very interesting, thank you 😉
Now, a question. “practice led to an over-supply of A320s and depressed values, appraisers concluded.” While this may appear logical and the theory is appealing, is it actually the case? I.e., are there more post-1997 A32x stored than 737NGs at the present time (and more pre-1997 than 737 classics), and how has the comparative trend evolved over time?
Is it possible to put a number on the value loss caused by having two engines on the A32x?
The value “loss” from having two (or more) engine offerings on the A320, may not be a loss at all. Remember 737NG operators must buy the aircraft without the benefit of being able to compete engine OEM’s against each other. Some have argued this results in increased engine costs at the time of purchase for 737NG operators. If true (and I expect sometimes it is), this would partly offset some lost A320 value which results from a reduced market for a used A320 due to engine type.
Obviously: many thanks!
AIG wasn’t the rating agencies fall to sin.
Sticking the up to then perfect corporate rating of the “structured financial products” bundlers onto those bundles formed from volatile equlity was their major fall.
The reason was obvious: the bundlers payed for appraisal of their structured products.
If i understood the explanation properly a major difference in appraisal value stemms from
Boeing wooing the collective much more effectively than Airbus does. The Boeing market gains from that difference.
Which imho is exactly what objective appraisers should be able to neutralise.
I guess I can stand with my oppinion that the difference is not bound to objective
differences in type utility.
We would not say the Boeing briefings are a “major” reason; it is “one” of many reasons.
Where do the maintenance records of each individual aircraft fall in the scheme to place a fair market value on that aircraft? I know records must be kept or the airplane will have significantly value, or no value at all. In some cases the aircraft cannot be legally sold for airline/charter service if the records are missing, inaccurate, or incomplete. This is the case of the recently sold 4 A-340s from Olympic (I believe the A-340s were actually owned by the Greek Government) to an airplane recycler in Florida. The aircraft are A-343s and sold for about $10M USD each, even though similarly aged A-343s with like hours cycles typically sell for about $40M+ USD. The maintenance records on these aircraft, and engines, were either missing or seriously incomplete. If I understand that situation correctly, none of the parts of these aircraft can be sold as there is no ‘paper trail’ on them.
Also, back around the time CAR was holding their first appreasal seminar (late 1980s or 1990), DL made a surprise purchase of several brand new white tail B-737-200ADVs from Boeing. These aircraft all built had not been delivered to the original customer who ordered them (I forgot who that was) and they were just sitting in the desert. It had been rumored at the time that DL got an exceptionally great price on all of them. Which apprasiers were involved in that deal?
You are correct, KC, more than a few aircraft have gone to the recycler as a result of poor record keeping. However, records problems are increasingly rare and play no role at all in blanket appraisals. Here is an example of how blanket appraisal work relative to aircraft-specific valuations:
In your city, the average home value might be $300,000, as assessed by some method. Your home, based on features, condition, number of bedrooms, etc, may be worth 10% more ($330,000). You will not know how much your home is worth, however, until a specific appraisal is done on your home. (As Uwe noted in the last discussion on this topic. Prior to 2008, some US appraisal firms may have set the value at $430,000 resulting in toxic assets and a whole host of downstream issues – this practice was at one time commonplace in aircraft markets as well). For aircraft, this tail-specific valuation usually involves a “survey” of the aircraft to be appraised. Maintenance records are studied, the aircraft itself is inspected, and the amount of work needed to transition the aircraft into its next fleet will be assessed. Often the value of a specific aircraft is depreciated by the cost of paint, repairs, and (most significantly) the cost to normalize the maintenance status of the aircraft so it can seamlessly drop into the next operators’ fleet. This final value number for a specific tail (like your house) may vary widely from the “average” value created by the appraisers.
Having not had the need to know the detail in my role, I thought I might join the queue offering my appreciation of being given exposure of the depths of the appraisal process.
Thanks very much for the insight — it’s not about the new aircraft as such, but I suspect that most of us have learned much from reading it.
This is not right. The first EETCs were done around the 1994 timeframe for Northwest by Lehman Brothers. There were some similar deals (JETS) for Boeing (on the United credit) at around the same timeframe. Prior to that there were an earlier security called an ETC — equipment trust certificate. But ETCs did not have the A, B, C tranches you mention. An ETC was simply a corporate bond backed by aircraft security, and attracting a one-notch upgrade from the corporate credit of the airline (sometimes two notches if the corporate credit was lousy).
The first aircraft securitizations happened in parallel or maybe a little earlier. There was a deal in 1992 (ALPS-92), another in 1994 (ALPS-94, if memory serves), but the first real (and gigantic) aircraft securitization was really the Airplanes deal in 1996 by Morgan Stanley for GPA (serviced by GECAS). These deals did have the A, B, C tranches you mentioned, and they did depend on appraisers.
There were a plethora of Continental ETCs that got caught in its early 90s bankruptcy, but that was prior to the EETCs. In the late 90s, Continental was a big user of EETCs, but that was as part of its renaissance after 1995. No Continental EETCs were present in either of its bankruptcies. EETC product simply didn’t exist at the time.
On the larger point, about there being wide disparity between what appraisers said, you are right. Deal-makers were very careful about what appraisers were used for a particular deal. Not unlike appraisers used in the house-mortgage market — mortgage brokers would pick one who would give the result desired.
But the discussion is tarnished by incorrect structured product history. EETCs weren’t present in the timeframe you mention. I know, I was there, I was an aircraft structured bond banker.
I do not know much about LTV’s, EETCs or EETCs, but you fellows may be
interested to know about a NAVBF (new aircraft value based financing)
arrangement Boeing applied to sell the first-ever wide-body aircraft sale behind
the Iron Curtain before it came down, three 767s to LOT Polish National
Airlines in 1988.
One of these was a-300, the one which made a perfect, almost NO damage,
belly landing at the Warsaw airport last month!
Poland owed the West $38.-Bill. in hard currency and no means to pay it back.
Consequently no W. Bank, including the EXAM Bank, was willing or able to
borrow Poland any more money for imports from the West of any kind!
LOT was fed-up with the IL-62′ they were flying on the N. Atlantic, after two
crashes in the “80s and were willing to stand up to enormous Russian
pressure not to ground the airplanes, andt agreed to buy 767s, as long as we
found them the money!
Fortunately, Jack Pierce, the Boeing CFO at that time, came up with the fol-
lowing idea Boeing had just applied in S. America.
We told LOT that we would “give them the airplanes for nothing,” providing
they gave us the original passenger load sheets on the IL-62s over the N.
Atlantic during the previous three years, which confirmed that as we expected,
that the majority of fares had been paid in US Dollars by relatives already living
in the US!
The documents also confirmed, that less than 60% of the fares paid in US
dollars on the Il-62s, would be adequate to make the monthly payments on the
767s, over a 12 year financing period, in addition to saving even more hard
currency on fuel, after which the W. Banks were scrambling over each other to
finance the 767 sale to LOT!
That was my Swan song at Boeing, but I did receive the “Pride-in-Excellence”
award for that sale, before I retired in 1989!
Have you heard the latest news on Bloomberg? Airbus is thinking of setting up a line in the good old U.S.A. where i don’t no but to i hope the don’t rub the salt in and build the 320neo in kansas.
“Don’t think for one second that we are not exploring our opportunities to go out and recruit Airbus,” said Wichita Mayor Carl Brewer, a former Boeing business manager. “We are making those phone calls.”
It has been very quit from your side for a long time and hope everything is ok!
Dealing with power outages at office and home. Home back up-office still out.
Scott I’m wondering to what extent appraisers consider whether the plane in question can be converted to a freighter at the end of its pax life. I now Al-Baker has complained that A has no design plan for converting A330s.
Did everyone hear that Venezuela has bought 4 A-340-500s from EK for $60M USD each? These A-345s are only about 5 years old. Then again none of the A-340 models are commanding top dollar. A 5 year old B-777-200ER or LR would command about twice that price, if not more.
Appraisers do take into account the prospect of P2F. That is why MD80 RVs commanded less than 737/727 RVs at the tail end of the curve, for example. MD80s (and DC9s) are widely regarded as more robust than Boeings but there is virtually no P2F potential for them, thus they are valued less.
Oops I forgot to add the link.
We didn’t get data for the -500 recently, but::
A340-600 2002 63.00e6 2011 97.00e6 600e3 815e3
B777-200ER 1997 48.80e6 2011 112.50e6 580e3 995e3
B777-300ER 2004 85.20e6 2011 136.20e6 850e3 1,25e6
The A340-500 is about 777-200ER equivalent, right?
I don’t think the B-77E, with about the same age, maintenance condition, hours, and cycles would get only $60M. It should get much more than that.
The A-345 also has more range than the B-77E. In terms of equivalent missions, the A-345 is closer to the B-77L. The twin engine B-77L has more range, and now that it has the 330 minute ETOPS, there is no difference in which great circle course it can fly when compared to the 4 engine A-345.
Chavez can open scheduled flights from css to pek or teheran with these ulh machines. Without etops or unwelcome diversion to unfriendly airports.
Really? If one looses just one engine, it has to divert. BTW, you do know that all models of the B-777 now have 330 minute ETOPS ratings, don’t you? So, they can fly the same great circle routing as any 4 engine airplane.
The still air distance between CCS and THR is only 6350 nm, or about 14 hours of flying time at 450 TAS. Even the A-332 can make that, you don’t need to go to an A-345. No the CCS to PEK is way different, at almost 7800 nm and over 17 hours at that same 450TAS. The great circle route takes it over a portion of New England portion of the US (Boston ARTCC). The distance between CCS and SVO is only about 5400 nm. Now if President Chavez wanted to go visit the new “Dear Leader”, the route is CCS to FNJ is 7750 nm and it takes him overhead IAD, PIT, and CLE.
Conviasa probably doesn’t get much out of any manufacturer provided ETOPS certs because they have nothing to complement that with.
They have no longrange twins. Only one 4holer: an A340-200.
Is the 777 330min ETOPS rating retroactive or limited to new deliveries?
Btw good old sandilands is more productive in producing provocating but knowledgeable planetalking blogs.. its been 7 days..
So, when you paid your subscription dues you got some guarantees
on posting density from management 😉
Well, pardon us, Keesje. We do this for free and sometimes we actually have to earn a living that takes priority. Then here in Seattle we had a major snow storm followed by a 12 hour ice storm. Our home was out of power for 15 hours and the office had no power for three days.
I was just teasing 😉 Home out of power for 15 hours during serious winter conditions.. Hope you have a good pile of dry wood behind the house and a lot of candles..
The B-777 330 Minute ETOIPS rating is retroactive for the B-77E, B-77W, B-77L, and B-77F. I made an error saying the new 330 ETOPS applies to all B-777s, it does not. It does not apply to the non-long range models, the B-772 and B-773.
Once every year or two my AC gets cut for half a day to accomodate scheduled line maintainance and vegetation cutback.
My lab has to be shut down and my work activity comes to a grinding halt.
I feel like our cat when the litterbox gets cleaned out.
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