Optimizing Value When Selling An Aircraft see more
NAFA member, Anthony Kioussis, President of Asset Insight, shares his viewpoint on optimizing the value of your aircraft when selling it.
Not many aircraft buyers acquire an aircraft with a specific date in mind to sell or replace an asset. While a little planning could help optimize their investment value, this thought process rarely comes into play during the exciting, and sometimes less than rational, aircraft acquisition period.
In a recent Pro Pilot Viewpoint article (November 2018, page 10) we discussed the importance of distinguishing between "low price" and "good value" in an effort to optimize an aircraft investment at point of purchase. Let's have a look at the financial dynamics that come into play when selling the asset.
I have yet to speak to an owner who believes their aircraft is anything but "the best" asset available for purchase when it is listed for sale. Fortunately, Asset Insight's tools allow for logic to prevail in the form of objective analytics and a standardized grading system allowing anyone to determine how their aircraft truly compares with like models listed for sale, as well as how it rates within the model's active fleet. There are also tools that make it possible to determine exactly how any aircraft's Residual Value is affected by the estimated expense of maintenance due, as well as the appraisal value of maintenance events completed. Simply put, you may have just completed a $1 million double-engine overhaul, but it may only add $750,000 (perhaps less) based on the aircraft's age and it's "market desirability."
Some aircraft owners, as well as inexperienced brokers, believe it is not possible to predict an aircraft's Residual Value (RV) more accurately than basing the aircraft's future value trend on the model's value degradation history. Thus, traditional RV forecasts start with an estimated Current Value, usually based on aircraft prices obtained from an industry "source." The Current Value estimate is then degraded based on the aircraft model's average historical annual depreciation percentage, and the resulting RV figures are usually presented as a line graph similar to the RV Trend line shown in Table A.
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This article was originally published in Pro Pilot magazine, February 2019, p. 10.
“Low Price” or “Good Value”? see more
NAFA member, Barbara Spoor, co-Founder of Asset Insight, LLC, discusses the difference between a low price and a good price and how prior planning produces a premium sale price.
What do you need to know before you purchase an aircraft to ensure that you get the best possible price when it’s time to sell?
While the terms “price” and “value” often are used interchangeably to describe an aircraft’s worth, they actually have different meanings. “Price” is what the buyer pays, while its “value” is the relative worth, utility, and/or importance placed on that asset. Since emotions can run high during the aircraft acquisition process, determining whether an aircraft carrying a “low price” represents “good value” requires a detailed analysis – one that focuses on its future maintenance requirements and estimated Residual Value (RV).
Consider the length of time you plan to keep the aircraft, and how many hours you intend to fly annually. Such data can help project the aircraft’s scheduled maintenance costs during your ownership term. This calculation is neither linear nor simple; costs assumed to be minimal actually can be much higher than anticipated.
For example, scheduled maintenance costs increase over time due to more comprehensive airframe inspections, required either by the manufacturer or new regulation. While some view airframe maintenance costs as relatively minor, they are not. If you plan to own the aircraft for five years, and it will need a double-engine overhaul within ten years, the value of the airplane may be reduced by what the next owner will have to spend: approximately half the cost of the overhaul, perhaps more for an older aircraft. That could run from the high six-figures to several million dollars, depending on make and model.
Carefully consider the cost of scheduled engine maintenance if the aircraft is not enrolled on an Hourly Cost Maintenance Program (HCMP), as maintenance expenses based on “time and materials” undoubtedly will increase over time. Opting to not enroll the aircraft on an HCMP upon purchase will increase your financial risk during your ownership period. And the aircraft still may require HCMP enrollment at resale to make it marketable, due to its “Maintenance Exposure to Ask Price Ratio” (“ETP Ratio”).
The ETP Ratio is a useful indicator of an aircraft’s marketability. It is computed by dividing an aircraft’s Maintenance Exposure (the financial liability accrued for future scheduled maintenance events) by the aircraft’s Ask Price. An analysis of “Days on Market” shows that when the ETP Ratio exceeds 40%, the Days on Market increase by more than 30%. For example, aircraft with ETP Ratios exceeding 40% during Q2 2018 were listed for sale an average of 72% longer than aircraft with ratios below 40% (169 days versus 291 Days on Market, respectively).
The Residual Value Projection
A traditional RV forecast starts with an assumed Current Value that then is degraded based on the aircraft model’s average historical annual depreciation percentage. But the aircraft’s future maintenance condition, perhaps the most important value influencer, is not accounted for appropriately, if at all. Since historical values and trends play no role in an aircraft’s future financial behavior, it’s best to obtain Residual Value figures using objective methodology that assesses the aircraft’s value independently, based on current maintenance condition, future requirements, and proven forward-looking market indicators.
A “low price” is easy to determine. “Good value” is derived by optimizing your investment by:
- Acquiring an aircraft able to perform your mission requirements, at a reasonable price;
- Stabilizing maintenance costs during your ownership period with HCMP enrollment;
- Limiting scheduled maintenance expenses not covered through an HCMP, based on the aircraft’s future maintenance requirement at time of purchase;
- Securing an objective, science-based Residual Value analysis; and,
- Remarketing an HCMP-enrolled aircraft at a predetermined date to ensure that the ETP Ratio is well below 40%.
Taking these steps can help you enjoy the best possible return from your aircraft – both while you own it and when you are ready to sell.
This article was originally published in Business Aviation Advisor on November 1, 2018.
New Line on RV Forecasting see more
NAFA member Anthony Kioussis, with Asset Insight, LLC, wrote an article for this month’s Business Aviation Advisor on how accurate forecasts of Residual Values of aircraft are a necessary part of proper financial planning.
Since an aircraft is a depreciating capital asset, proper financial planning requires an accurate forecast of its anticipated Residual Value (RV) before acquisition.
Residual Value forecasting historically has been viewed as a “best guess” – even by some aircraft appraisers. RV predictions used to be based on an aircraft model’s historical performance, but “past performance is not indicative of future results.”
And while RVs historically have focused on a single, defined set of parameters for all makes and models of aircraft, the range of makes and models available for sale at any particular moment is continually changing. Each aircraft moves through its own life cycle, independent of events experienced by those of similar makes and models. RV forecasting today takes into account data for the specific aircraft under review, every serial number for the make/model under review, and other comparable models, plus the overall market.
While traditional RV parameters simply “aged” all aircraft based on the market on the day of the projection, today’s technology can analyze a single aircraft in real time within the overall market. That evaluation now includes:
- Brand-specific desirability and demand,
- Changes in the cost of money and interest,
- Global economic factors,
- Anticipated “For Sale” market conditions and marketability,
- Market factors associated with aircraft availability and age.
Residual Value calculation precision also has been improved through maintenance analytics, used to objectively grade the maintenance condition of a specific aircraft versus all comparable aircraft. Those analytics also can calculate the value of any Hourly Cost Maintenance Program enrollment, and the impact of that program on an aircraft’s current value. This is known as the projected “Maintenance Equity”: the funds remaining before scheduled maintenance is required.
Finance and leasing companies still want to see the traditional RV trend line (usually presented as a straight-line graph). While this line’s accuracy has improved, more institutions want to see the actual RV line, usually a jagged line that also accounts for Maintenance Equity. Computing speed and advanced modeling techniques enable ongoing, simultaneous Maintenance Equity analyses of all comparable aircraft, thereby placing any one aircraft’s forecasted RV in context relative to that of comparable makes and models currently on the market.
In the case of operating leases, many lessors purchase Residual Value Insurance (RVI) to minimize their downside RV risk at lease termination, and lessees are required to return the asset under a predetermined set of “lease return provisions.” Owners also can purchase RVI, but they usually make an assumption as to what their aircraft will be worth when they sell or trade it. “Hoping” to achieve the assumed value is never a good strategy.
RV accuracy will improve further where software programs reside on true Artificial Intelligence (AI) platforms, thanks to embedded algorithms – programs that learn from themselves, thereby becoming smarter as they process more data. As computing power increases, that learning capability will move exponentially with the growth of computing speed.
The newest software programs have the ability to replicate analytical processes continually and exactly, eliminating subjectivity and introduction of human error.
RV calculations for any individual aircraft don’t take into account changes to regional economic conditions, like the CPI, or the GDP. But they offer a good starting point from which to make additional projections based on economy-neutral, science-driven figures.
What does this mean for you as you shop for your next aircraft? Improved RV forecasting provides a more exact assessment of your aircraft’s marketability. The greater the anticipated cost of required future maintenance, the lower the resale value of your aircraft – and the longer it could take to sell. By monitoring your RV carefully, you’ll have a more precise idea of the best time to sell or trade your aircraft.
This article was originally published by Business Aviation Advisor on July 1, 2018.