NAFA member Anthony Kioussis, with Asset Insight, LLC, wrote an article for this month’s AvBuyer Magazine on understanding aircraft value.
Let’s assume you spot an aircraft of interest while perusing AvBuyer. After obtaining more details you determine it’s one you wish to examine closely. What are the metrics you
need to consider if your plan is to own this asset for as many as five years?
The aircraft’s flight hours and cycles would be important in determining your offer price, but what else should play a role in your valuation, or even your offer for this aircraft?
1. Maintenance Requirements
You should begin by examining the asset’s upcoming maintenance requirements. How many scheduled maintenance events will be due based on your planned utilization and how much will those events cost? Calculating such detail using a standardized measurement process would allow you to compare this aircraft’s maintenance to any other unit you might be considering.
2. Maintenance Equity
Next, how much Maintenance Equity does this aircraft have left? Maintenance Equity represents the embedded value of maintenance an aircraft has available to fly on. Every aircraft’s maximum available Maintenance Equity value is achieved the day it comes off the production line.
As an aircraft is utilized, Maintenance Equity decreases. As scheduled maintenance is completed, Maintenance Equity increases. Accordingly, knowing how many dollars are available to fly on would help you determine an appropriate, and justifiable offer price.
3. Maintenance Exposure
Conversely, how much Maintenance Exposure is burdening this asset? Maintenance Exposure represents the aircraft’s financial liability accrued with respect to future scheduled maintenance events. Again, every aircraft’s lowest Maintenance Exposure value is achieved the day it comes off the production line.
As the aircraft is utilized, Maintenance Expense is incurred. As scheduled maintenance is completed, Maintenance Exposure decreases. Knowing an aircraft’s Maintenance Exposure can also help you determine an appropriate offer price.
4. ETP Ratio
But perhaps more importantly, computing the aircraft’s Maintenance Exposure would allow you to determine the asset’s Maintenance Exposure to Ask Price Ratio (ETP Ratio). The ETP Ratio is a useful indicator of an aircraft’s marketability.
‘Days on Market’ analysis has proven that when an aircraft’s ETP Ratio is greater than 40%, a listed aircraft’s Days on Market increase (in many cases by more than 30%). By way of example, aircraft whose ETP Ratio exceeded 40% during Q2 2018 were listed ‘For Sale’ 72% longer (on average) than aircraft whose Ratio was below 40% (that’s 169 days versus 291 days on the market).
Application to a Prospective Aircraft
Computing an aircraft’s current and future ETP Ratio (the latter is based on its estimated Residual Value) can help you determine if this unit represents ‘good value’. Keeping in mind that an aircraft is a depreciating asset, an ETP Ratio exceeding 40% today is likely to result in an ETP Ratio substantially over 40% when you plan to replace it in five years’ time.
So, what might appear to be a ‘low price’ today could actually make you this unit’s final owner (absent finding a buyer seeking a disposable aircraft five years hence).
Of course, deriving these metrics on your own can be time-consuming and challenging to complete, but there are numerous entities that can help, some at a nominal fee. It’s well worth paying a little now to research the right aircraft to acquire, rather than spending a great deal more in the future, having purchased the wrong one.
Tony Kioussis has over 40 years of aviation industry experience within Business and General Aviation, major airlines, fixed-wing & rotary OEMs, technical services providers and financial services companies. Prior to spearheading the launch of Asset Insight, he served as VP, Strategic Marketing with GE Capital’s Corporate Aircraft Finance group. He contributes a monthly online blog to AvBuyer.com and market analysis for the Business Aviation Market Overview section of this publication.
Contact him via firstname.lastname@example.org.
To view the entire article, click here.
This article was originally published by AvBuyer Magazine in August 2018.