Appraised Value: What's an aircraft worth?

May 1, 2002
Appraised Value What's an aircraft worth?

By Fred Workley

The maintenance you perform on an aircraft has an impact on its value. Appraisers use the maintenance records as well as visual evaluations to determine value. The availability of maintenance records and their completeness related to the accomplishment of the maintenance program, life-limited parts, and damage history also has a bearing on the appraised value of an aircraft.

The primary objective of an aircraft value appraisal is the determination of a numerical result, either as a range or most probable dollar amount of a value now, or at some specific point in the past or future. A good source for these details about aircraft appraisals is the International Society of Transport Aircraft Trading "Transport Aircraft Appraisal Program."

Base value

Base value is the appraiser's opinion of the underlying economic value of an aircraft in an open, unrestricted, stable market environment with a reasonable balance of supply and demand. It assumes full consideration of its "highest and best use." An aircraft's base value is found in the historical trend of values and in the projection of value trends and presumes an arm's-length, cash transaction between willing, able, and knowledgeable parties, acting prudently with an absence of duress, and with a reasonable period of time available for marketing. In most cases the base value of an aircraft assumes its physical condition is average for an aircraft of its type and age, and its maintenance time status is at mid-life, mid-time (or benefiting from an above-average maintenance status if it is new or nearly new).

Base value pertains to a somewhat idealized aircraft and market combination. It may not necessarily reflect the actual value of the aircraft being appraised. Rather it may serve as a starting value to which adjustments may be applied to determine the actual value. Base value is related to long-term market trends thus it is often applied in terms of projections of residual values and historical values. There are times when the value of an aircraft is not reflected in long-term market trends, when projected future profits or discounted rental streams may give a better value.

Types of appraisalsThere are essentially five types of appraisals. A desktop appraisal does not include any inspection of the aircraft or review of its maintenance records. It is based upon assumed aircraft condition and maintenance status, information provided to the appraiser, or from the appraiser's own database.

The extended desktop appraisal includes consideration of the maintenance status information provided to the appraiser from the client, aircraft operator, or another appraiser's report but not any on-site inspection of the aircraft or its maintenance records.

A full appraisal includes an inspection of the aircraft and its maintenance records. This inspection determines the overall condition of the aircraft and records to support the appraiser's opinion of the value. The full appraisal normally does not require that inspection panels be opened or that any record archives be reviewed in detail.

A comprehensive appraisal includes a detailed inspection of the aircraft and records. Sufficient detail is required to ensure that the records are complete and in good order to allow for the re-registration of the aircraft in a different country.

A financial appraisal determines the value of an aircraft to an investor upon the income earning potential from its lease and residual value. It may be done in conjunction with either desktop or full appraisals.

Market value

Market value or current market value (value at the time of the analysis) is the appraiser's opinion of the most likely trading price that may be generated under the market conditions and circumstances that are perceived to exist at a particular time. Market value assumes that the aircraft is valued for its highest and best use, that the parties to the sale are willing, able, prudent, knowledgeable, and under no pressure for a prompt sale. The transaction is negotiated in an open, unrestricted market at arm's-length for cash or an equivalent consideration with an adequate amount of time for effective exposure to any prospective buyers.

If the market is stable, market value often tends to be consistent with base value. When equilibrium between supply and demand does not exist then there may be a variance between the two. The aircraft's maintenance status and configuration can influence the value so the appraiser's report needs to clearly state any assumptions. Market value of the aircraft will be based on one of these two approaches: (1) Upon an assumed average physical condition and mid-life maintenance time status, depending on the nature of the appraisal assignment, or (2) based on actual or given physical condition and/or maintenance time status.

Distress value

Distress value is the appraiser's opinion of the price that an aircraft could be sold under abnormal conditions. These conditions may include an auction, liquidation, any commercial restrictions, legal complications, or an artificially limited marketing time period. If there is a perception that the seller is under duress to sell or there are other factors that reduce the bargaining leverage of the seller, thus giving the buyer a significant advantage, there may be a discounted selling price. It is assumed that the market is not balanced because of the seller's motivation. Otherwise both parties are willing, able, knowledgeable, and prudent, having negotiated at arm's-length under the market conditions that existed during the negotiations. There are also situations when buyers are under time pressures or other business situations where they are willing to pay a premium price thus changing the perceived value.

Securitized value

The securitized value or lease-encumbered value is an appraiser's opinion of current market value. It takes into account the rent and terms of a specific lease payment plan and considers the future residual value at lease termination. Also considered is an appropriate discount rate. The appraiser may not be fully aware of all the credit risks attributed to the parties involved or the time-value to all parties. Furthermore, information may not be known such as lease provisions pertaining to security deposits, term extensions, purchase options with associate dates, sub-lease provisions, repossession rights, reserve payments, and return conditions.

You will find these values used in appraisal reports. Look for a statement of the appraisal's objective. The report could determine a fair market value of the aircraft, determine a future residual value, or determine or forecast a fair market lease rate for an aircraft. Other objectives could be to determine: The value of the aircraft for lease or sale; present and future aircraft value for loan collateral; future value for establishing residual insurance premiums; values for basis of state and local taxes; fleet values to support equity stock offerings, values in mergers or bankruptcies; and values acceptable to the IRS for contributions to museums or charity.

Appraiser's report

Look in the appraiser's report for the specific kind of value described with its accompanying explanation. It is important to determine when (by date) the value estimate or forecasted value applied. Good appraisal practice requires the inclusion of certain explanations, descriptions, and statements. A detailed description of property is necessary; this would include the aircraft, engine, spare parts, or other property. Identification must be made by specific model number and serial number for the aircraft, engines, or equipment as well as stating the date of manufacture. The physical condition must be described as well as major points about its value. Any legal rights that are not obvious must be shown along with any restrictions implicit in the ownership.

Look for statements, information, and/or data, which were obtained by the appraiser, summarized, or stated in full in the report. The sources of the data should be identified so that users can verify the data. The person who makes the appraisal or the person who has the appraisal conducted under his supervision should sign the report. In many instances the validity of the appraiser's conclusions as to the value of the aircraft is contingent upon the validity of statements, information, and/or data that he has relied upon, for example, aircraft logbooks and maintenance records. The appraiser can rely upon and use these records as long as the source of the information is stated. Good appraisal practice requires that the appraiser state any other contingent or limiting conditions that affect the appraisal, such as a value contingent upon the completion of certain repairs, overhauls, modifications or restoration.

Regardless of the type of appraisal being performed, the appraiser should clearly state the type of appraisal being performed, any principle assumptions, and the sources of information upon which the appraisal is based. Remember that the maintenance status of an aircraft has a bearing on its value. Do good work. Keep the value high. Keep 'em Flying!

Fred Workley, president of Workley Aircraft and Maintenance Inc. in Benton City, WA, and Indianapolis, IN, is on the technical committees of PAMA and NATA.