The Value of Words
Understanding terminology used in aircraft appraisals
By Fred Workley
The aircraft maintenance profession has a set of terms and vocabulary that is used to describe how we maintain aircraft. Every trade or profession has evolved a vocabulary of its own in which words and phrases, that may also be in common everyday use, are given special meaning within the profession.
Likewise, the vocabulary of aircraft values may be generally well understood within the appraiser's profession, but aircraft maintenance professionals also may need to understand the vocabulary of the aircraft appraiser. You may be asked to review one of these written appraisal reports that utilize various terms that describe the aircraft's value.
An aircraft appraisal is a determination of an aircraft's value. The most common types of values are: Base Value, Market Value, Distress Value, and Securitized Value also known as Lease-Encumbered Value. Unique circumstances may require other specific definitions, but these would generally be defined in the appraiser's report. As much as possible, appraisers will use terms that follow established guidelines. Where the circumstances of a particular appraisal assignment dictate a departure from these guidelines, the appraiser's report should clearly state the definitions attached to terms that are used in the report to preclude any possibility that they could be misunderstood.
Base Value is the Appraiser's opinion of the underlying economic value of an aircraft in an open, unrestricted, stable market with a reasonable balance of supply and demand. This market environment assumes full consideration of the aircraft's "highest and best use," and is founded in the historical trend of values as well as in the projection of value trends and presumes an arm's-length, cash transaction between willing, able and knowledgeable parties, with an absence of duress. Also, it is assumed that there is reasonable period of time available for marketing.
In most cases, the Base Value of an aircraft further assumes its physical condition is average for an aircraft of its type and age. The aircraft's maintenance time status is at mid-life, mid-time (or benefiting from an above-average maintenance status if it is considered new or nearly new, as the case may be). Since Base Value pertains to a somewhat idealized aircraft and market combination, it may not necessarily reflect the actual value of the aircraft in question, but is a nominal starting value to which adjustments may be applied to determine an actual value. The Base Value definition is commonly applied to analyses of historical values and projections of residual values (aircraft's value at a future date, often at the time of the conclusion of a long-term lease) because it is related to long-term market trends. This is not the same as the terms haul/parts value, scrap value, or salvage values that refer to an asset after its useful life is ended. These terms usually refer to the estimated or actual selling price or the net return after removal or disposal costs.
Market Value (or Fair Market Value, Current Market Value, or Current Fair Market Value), is the Appraiser's opinion of the most likely trading price that may be generated for an aircraft under the market circumstances that are perceived to exist at the time in question. Market Value assumes that the aircraft is valued for its highest and best use and that the parties to the hypothetical sale transaction are willing, able, prudent and knowledgeable. All parties are under no unusual pressure for a prompt sale. Also, it is assumed that the transaction would be negotiated in an open and unrestricted market on an arm's-length basis, for cash or equivalent consideration. There would be an adequate amount of time for effective exposure to prospective buyers.
The Market Value of a specific aircraft will tend to be somewhat consistent with its Base Value in a stable market environment. Where a reasonable equilibrium between supply and demand does not exist, trading prices, and therefore Market Values, are likely to be at variance with the Base Value for a particular aircraft. Market Value may be based upon either the actual (or specified) physical condition and maintenance time status of the aircraft. Alternatively, market value may depend upon an assumed average physical condition and mid-life, mid-time maintenance time status.
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