Pontifications: Aircraft values vary widely

Hamilton KING5_2

By Scott Hamilton

Dec. 14, 2015, (c) Leeham Co: Aircraft valuations came to the forefront following comments by Richard Anderson, CEO of Delta Air Lines, over just how much a 10-year old Boeing 777-200ER was worth. He claimed the airplane was only valued at $10m. Boeing’s investor relations department immediately pushed back against this low price, circulating to the aerospace analyst community that a number of appraisers placed the value in the $50m-$60m range.

Anderson later was quoted as saying Boeing Capital Corp. offered Delta the aircraft for that price. BCC didn’t comment.

LNC wrote at the time, and later, that Anderson was correct. We noted, however, there are a lot of caveats that come with the $10m, rooted in the fundamental fact that this price had to be for a “run out” model that would require expensive airframe and engine maintenance, repair and overhaul, and interior reconfiguration. This could add as much as $30m to the price, or $40m all-in–still substantially less than the appraised figures for a “half-life” example.

Appraisals are an inexact exercise that not only depend on the maintenance condition of the airplanes, whether they are “desk-top” or inspection appraisals and the methodology of the various appraisal companies, backed by market intelligence data.

Boeing’s IR was factually correct about the appraiser numbers–the appraiser valuations for half-life 10-year old 777-200ERs are listed in the $50m-$60m range. Anderson was right: the model can have a market value of $10m, if it is run-out. But the valuations from appraisers vary widely for the same airplane, as will be illustrated below.

First, for those who haven’t read previous posts on valuations, a small refresher.

Base Value and Current Market Value

Airplane valuations are founded on what is known in the industry as Base Value and Current Market Value. The Base Value starts with the new aircraft value, which is not based on List Price, but on certain assumptions about actual sales prices. These are acquired through appraisers by their own market intelligence and sometimes, though rarely, guidance by the manufacturers, who naturally want to keep actual sales prices secret. But the grapevine is rather prolific and there is usually enough information in the market for appraisers to have a reasonable understanding of new airplane pricing and market trades of used aircraft. It’s this underlying information that forms the starting point for appraisals.

Base Value assumes a balance supply-and-demand of aircraft, no unusual economic conditions, and no outside, influencing factors (wars, terror events, etc).

But market conditions can upend Base Values at any given time. Supply-demand imbalance affects prices. These went down precipitously during the 1991 and 2001 Gulf Wars, and certainly after 9/11. But other events can also affect supply-demand, such as the global SARS epidemic, or an unusual amount of bankruptcies that ground large numbers of select fleet types.

Good, but less desirable airplanes also can have a value that is less than normal. Values in recent years of Airbus A319s and Boeing 737-700s, both perfectly good airplanes, fell more than historical trend lines as airlines up-gauged to the A320 and 737-800. The Fokker 100, a perfectly good airplane, has virtually no demand due to the collapse of the company and limited numbers of the aircraft.

This is called Current Market Value. CMV usually, but not always, is less than Base Value. Where CMV is higher than Base Value, there is typically unusually strong demand for the airplane. There was a period where strong global economics and airline expansion pushed values of McDonnell Douglas DC-10-30s above the Base Value.

Half-Life, Run-Out

Appraiser field inspections of aircraft are extremely rare, and full access and inspection of maintenance records usually occur only in some merger-and-acquisition activity, if then. So “desk-top” appraisals are the norm. These are what the name suggests: an appraisal given from the desk top in an office.

There have to be basic assumptions that are standardized. One of these is the assumption that an airplane is at “half-life” in its maintenance cycle. That is, half way between a new, delivered condition, or one fresh out of a heavy maintenance check, but only half-way to the next full, heavy maintenance check. Thus, in the Delta Air Lines example, Anderson was talking about a “run-out” value and Boeing was talking about a “half-life” value.

Valuations vary widely

With the above as background, it’s just a simple fact of life that aircraft values vary widely among appraisers. This objectively may be due to differences in methodology and market intelligence. Subjectively, some appraisers simply like one aircraft type better than another. Some European appraisers tend to lean Airbus and some US appraisers tend to lean Boeing. Some appraisers are highly critical of the Airbus practice of maintaining production through economic valleys, while Boeing was more willing to adjust production rates up and down to reflect strong or weak economies.

With that said, let’s look at a recent Asset Backed Securities (ABS) offering under the name of SAIL, which will be managed by BOC Aviation.

SAIL ABS

The lowest valuation is used as the base to calculate the percentage difference between the high and low price.

The three appraisers retained for this ABS are MBA, BK Assoc. and IBA. The former two are headquartered in the US and the latter is headquartered in London. All three provided desk-top appraisals, assuming half-life condition. Within the industry, a 10% variance is considered to be within agreement and accurate.

The aircraft delivered just a few months ago has the closest agreement among the three. The Airbus A330-300, delivered nearly two years ago, falls within the 10%. But so does a 2012 delivery of a Boeing 737-900ER.

The appraisal of the Embraer E-190LR, delivered in April 2014, shows less agreement, likely because this is a plane for which there have been few sales and even fewer trades. The widest differences of opinions come with the valuations for the Boeing 777-300ER and the Airbus A320.

Boeing 787 glitches continue

Flight Global reported last week that two Air Traffic Control agencies have “blacklisted” the Boeing 787 due to faults in the tracking software in the aircraft. This is a rather stunning piece of news. The fault makes the airplanes invisible to ATC. The airplane entered service in 2013 and more than 300 have been delivered.

13 Comments on “Pontifications: Aircraft values vary widely

  1. Scott,
    Do all manufacturers are obliged to ensure, on contract, during the sale of a new aircraft, the market value according to a time scale for resale (value after 3 years, another value after 5 years, after 7 years, etc.)?

    • OEMs are loath to provide Residual Value Guarantees although it has been done in the past. Bombardier provided RVGs on the CRJs and has had to pay out monies as a result. There continues to be a balance sheet liability, I believe. This is one thing that was asked by some potential customers on the CSeries, and BBD refused to provide it based on CRJ experience. Airbus provided RVGs on A340s and has had to do some payouts. It’s rumored to have provided some RVGs on A380s, but I don’t have confirmation on this. I’m not sure of McDonnell Douglas provided RVGs on the MD-95 before Boeing acquired MDC.

      • Yes, a RVG does leave a balance sheet liability, though it is contingent. If the lessor is able to re-sell the product at end of term for the stated residual or better, then no liability to the OEM or dealer. I will say that if you are resorting to RVG, then you are either driving a ridiculously low lease rate, or you’ve got some other component to the deal that is uncompetitive (ie: sales price or implicit interest rate). In my experience (non aviation) you are almost always guaranteed to be paying out in the end.

  2. I was thinking this 787 issue was no real big issue until I read the following statement from the Flight Global article: “It is important to understand that this is not a safety concern,” Boeing says. “Existing systems such as radar provide the necessary positional data to [air traffic control] that allow the continued safe operation of the fleet.”

    Now what kind of radar are they referring to? The same that allowed the Malaysian 777 to simply disappear (as it only tracked the transponders) or some sort of military grade radar, which I understand, is not used by most ATC organizations.

    Have I misunderstood something here?

    • “It is important to understand that this is not a safety concern,” Boeing says.

      I agree with your concern. It’s not good for ATC to be having arguments with pilots about where their plane actually is – even if the issue can be resolved by reference to external sources of information,

      • “It’s not good for ATC to be having arguments with pilots about where their plane actually is – even if the issue can be resolved by reference to external sources of information.”

        Totally agree. It brings about an unnecessary workload and distraction to ATC controllers, in contacting the pilots or using other means to urgently determine their actual positions, while holding off attention to everyone else in the air.

    • The reporting ATC orgs do not have full Radar coverage.
      Thus they rely on ADS-B data for separation management.
      Then, “no position” would be preferable to “wrong position” reported.
      This is not the first electronics issue that exposes insuffiecient testing coverage. DFDR storing phantom values was the previous issue ( found via postmortem of the battery problems).

    • I am not up on all the different technologies, but I hope that ADS-B is unrelated to the transponder technology used for TCAS in-air collision avoidance systems?

  3. I believe there was false position report involved as well or the issue.

    Not that it makes it any better.

    And as noted, places where there is not Radar coverage and you are counting on ADS-B as the primary, you have to know there is an issue to go to backup.

    That thing about not knowing you need to ask the question.

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