Fundamentals of Aircraft Valuations - Aviation News

Fundamentals of Aircraft ValuationsAirline Economics School | Seoul, Korea 2019

Anne Correa, Vice President | Airline & Airport Services

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• IOSA• ISAGO

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Management

Industry Credentials

2

Agenda

What is the Value of an Aircraft

What Types of Exposure Impact Value

How to Manage Exposure

What are the Industry Trends

Forecasting Value

What Is the Current Market Outlook

3

4

The commercial aircraft fleet is valued at ~US$840 billion

§ Over 1,500 aircraft were delivered across the globe, adding just over US$95 billion of value

§ Asian region led with 695 aircraft delivered, valued at US$43 billion, followed by Europe with an additional 330, valued at US$18 billion

2018 Saw Tremendous Growth

Source: mba REDBOOK STAR Fleet, March 2019

-

50

100

150

200

250

300

350

400

450

< 5 Years 5-10 Years 10-15 Years 15-20 Years > 20 Years

TurbopropRegionalNarrowbodyWidebody

US$

Billi

on

Age of Aircraft

Criteria Base Value Market Value Distress Value

Airc

raft

Time Status (if not new) Usually mid-time, mid life Mid life / as found Usually as found

Physical Condition (if not new)

Usually average, considering type and age Average or as found Usually as found

Highest, best use valuationPa

rties Willing & able

Lack of pressure

Mar

ket Open, unrestricted

State of market balance Equilibrium As perceived at the time As perceived at the time

Tran

sact

ion

Arm’s-length

Sale for cash or equivalent

Adequate time for effective marketing

Single – unit sale Usually Maybe

The principal types of values are Base, Market & Distress

5Notes: Definitions per the International Society of Transport Aircraft Trading (ISTAT) handbook

15.0

20.0

25.0

30.0

35.0

40.0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

BV MV Distress

6

Base vs. Market vs. Distress Values

Source: mba REDBOOK

Airbus A320-200 Five Year Build$M

USD

The A320-200 market value is above the base value, implying

more demand than supply

The A320-200 market value is below the base value, implying

more supply than demand

7

An aircraft’s value means different things to different people

Securitized Value or Lease- Encumbered

Value

Salvage or Part-Out Value Value-In-UseScrap Value

§ When an aircraft has a lease attached or a sale-leaseback

§ Usually when disassembly will yield more value than the aircraft as a whole

§ When an aircraft has a unique attribute specific to a situation

§ When estimated value is based solely on metal or other recyclable materials

Used

Valuation Methodology

§ Net Present Value of lease payment stream

§ Estimated Future Residual Value at lease termination

§ Estimated selling price of marketable parts and components that could be salvaged for re-use

§ Examples are: Updated Interior, Entertainment Systems, Bars

§ Other operators may not value it the same, but it is important for current owner’s brand

§ Essentially the value to meltdown the parts

Appraisers are asked for a specific type of value depending on the situation

Why does the aviation industry need appraisers?

How do you determine a market value when there is a lack of visibility?

§ Remarketing

§ Portfolio Analysis

§ Asset Management

§ Fleet Planning

§ Leasing Companies

§ Manufacturers

§ Financiers / Brokers

Transaction Data comes from a variety of sources

§ Since 1990, USA market transaction information is no longer available or obtainable. Major U.S. Carriers and the Boeing Commercial Airplane Company succeeded in having the U.S. Department of Transportation withhold Form 41 transactional information.

§ Market information is developed, but is acquired through an appraiser's network of airline and industry sources

§ Due to nature of the information, strict confidentiality is assured and honored

§ Appraisers provide an unbiased 3rd party value

The Aviation Market is not an open market like shipping or real estate

8

An aircraft valuation is more than just a number

§ A Valuation Report should provide these ten essential items:1) Date of the Report2) Identification of the Client3) Description of the Property4) Statement of the Type and Objectives of the Appraisal5) Definitions6) Statement of Contingent and Limiting Conditions to which the

Appraisal Findings are Subject7) Description and Explanation of the Appraisal Method Used8) Statement of the Appraiser’s Independence and Disinterest9) Signatures to Appraisal Reports10) Disclaimers

§ A Valuation Report may also provide:§ Incident / Accident History§ Recent Availability and Transactions§ Value Trending

9

Agenda


What Factors May Impact Value



Forecasting Value


10

11

Different types of exposure have an impact on the volatility and liquidity of an asset

Volatility&

LiquidityAircraft

Performance

MarketProspects

ProductionCycle

FinancingEnvironment

ExternalEnvironment


Volatility&

Liquidity

AircraftPerformance

MarketProspects

ProductionCycle


ExternalEnvironment

§ Specifications

§ Engines – Manufacturer & Thrust

§ Operating Weights

§ Cabin & Buyer-furnished equipment (BFE)

§ Technology

§ Family Affiliation

§ Regulation

Aircraft Performance Considerations are:

12

13


Volatility&

Liquidity

AircraftPerformance

MarketProspects

ProductionCycle


ExternalEnvironment

§ Order-books

§ Aircraft Placements

§ Operator Base

§ Geographic Penetration

§ Convertibility

§ Competitors

Market Prospects to Keep In Mind are:

14


Volatility&

Liquidity

AircraftPerformance

MarketProspects

ProductionCycle


ExternalEnvironment

§ Place in the Cycle

§ First off the line

§ Last off the line

§ Somewhere in between

§ Production Rate

Production Cycle Considerations are:

15

737-400 Last Production Cycle Comparison

0%

20%

40%

60%

80%

100%

120%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

First Year (1988) Mid Year (1993) Last Year (1999)

Res

idua

l Val

ue

Age of Aircraft

Volatility&

Liquidity

AircraftPerformance

MarketProspects

ProductionCycle


ExternalEnvironment

16

2019 Welcomes a Strong Aircraft Financing Environment

Source: Boeing’s Current Aircraft Finance Market Outlook 2019

Volatility&

Liquidity

AircraftPerformance

MarketProspects

ProductionCycle


ExternalEnvironment

17

We are seeing more lessors and increased fragmentation over time


Number of Lessors

Volatility&

Liquidity

AircraftPerformance

MarketProspects

ProductionCycle


ExternalEnvironment

18

Slower travel growth is expected, but still above trend

Volatility&

Liquidity

AircraftPerformance

MarketProspects

ProductionCycle


ExternalEnvironmentSource: IATA’s statistics, IATA’s own forecast

19

Airlines continue to see stable growth in the 10th consecutive year of profit

Volatility&

Liquidity

AircraftPerformance

MarketProspects

ProductionCycle


ExternalEnvironmentSource: ICAO, IATA Statistics, IATA forecasts

20

Operator performance and profit margins can have an impact

§ Airline financials year on year with key financial ratios to gauge financial health

§ Overview of routes and competitors to understand strategic position in markets served

§ Network performance compared to industry averages to benchmark operational efficiency

§ Aircraft ownership information to show lessors servicing the airline and owned aircraft

§ Fleet orders, deliveries and deferrals information§ Incidents and accidents to monitor safety risk § SWOT analysis detailing competitive advantages, growth

opportunities, and risks§ News and events related to the airline and its operating

region for historical and current developments

Airline Analysis Report is an mba product bringing together data sourced from STAR Fleet, Company Financials, Industry Reports, OAG (source list not exhaustive)

Volatility&

Liquidity

AircraftPerformance

MarketProspects

ProductionCycle


ExternalEnvironment

Agenda





Forecasting Value


21

22

I want to optimize my return on invested capital. Can I manage my exposure to minimize risk?

23

Aircraft Value vs. Lease Value

-$15.00

-$10.00

-$5.00

$0.00

$5.00

$10.00

$15.00

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec

-14

Jun-

15D

ec-1

5Ju

n-16

Dec

-16

Jun-

17D

ec-1

7Ju

n-18

Dec

-18

Jun-

19D

ec-1

9Ju

n-20

Dec

-20

Jun-

21D

ec-2

1Ju

n-22

Dec

-22

Jun-

23D

ec-2

3Ju

n-24

Dec

-24

Jun-

25D

ec-2

5Ju

n-26

Dec

-26

Jun-

27D

ec-2

7Ju

n-28

Dec

-28

Jun-

29

Mai

nten

ace

Cos

t

Life

Rem

aini

ng

Half-Life

Full-Life

Lease Return

Lease End Compensation

Minimum Return Conditions

Maintenance can constitute 30% of an aircraft’s value depending on where it is in the life cycle

-

5.0

10.0

15.0

20.0

25.0

30.0

Milli

ons

What effect can maintenance have on value?

Current Market Value

Half-Life

2010 Boeing 737-700 with CFM56-7B22 Engines

Source: REDBOOK, mba analysis

Notes: Data as of Q1 2019

(2) Engine Shop Visit (ESV) 1st Run

Maintenance Event ValueCost

~ $3.2M

(2) LLP Replacements ~ $3.5M

Landing Gear ~ $0.3M

Intermediate Check ~ $0.3M

Heavy Checks ~ $1.1M

Maintenance Effect ~ $15.2M

Delta from Half-Life ~ $7.6M

2019

24

Where an asset’s value comes from will change over its lifetime

25

26

REDBOOK strives to be the principal source of aircraft and engine intelligence for aviation industry professionals as they make key decisions for their businesses

STAR Fleet provides access owner, operator and utilization data for the global fleet with updates daily.

Compare historical asset values back to the 1980s with economic indicators to see Market Trends

Maintenance Forecasting contains powerful insights and statistics derived from STAR Fleet and mba’s trusted values

Track and manage assets by model or MSN in your Portfolio

Base and Market Values for most commonly traded aircraft (Fixed wing and Rotorcraft). Find Lease Rates, Aircraft Ranking and key statistics here

Engine Values for over 75 types

Unlimited Clicks, Unlimited Queries and Unlimited Value Requests

mba offers a user-friendly system for investors and airlines to see values and critical industry data

27

Find the latest news and information on all commercial aircraft

28

Check out values at half-life, full-life and in a distressed market

29

Adjust values and find lease rates

30

Analyze the global fleet, its operators, owners and utilization

Agenda





Forecasting Value


31

Industry Hot Topics Affecting Value

Number of Parked Aircraft

Supplier Production Issues

Production Gaps

Short Term decline of Economic Life

Increased percent of Leased Aircraft

Aftermarket for Engines

Entry of New Technology v. Last Off-The-Line

32

33

Current Generation Availability

0

20

40

60

80

100

120

NB Total WB Total

Source: Airfax

Avai

labl

e Ai

rcra

ft

34

Average Retirement Age

Average Age of Retirement 2009 – 2018

Narrowbody: 26.1 Widebody: 24.1

Regional Jet: 10.8 Turboprop: 24.7

Change in Retirement Age Since 2009

Narrowbody: -34.7% Widebody: -29.9%

Regional Jet: -21.7% Turboprop: -22.2%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Narrowbody Regional Jet Turboprop Widebody

Source: mba STAR Fleet, mba analysisNotes: Data as of Q1 2019

Age

at R

etire

men

t

$38.00

$40.00

$42.00

$44.00

$46.00

$48.00

$50.00

$52.00

$54.00

0

500

1000

1500

2000

2500

3000

3500

4000

4500

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Backlog Deliveries Backlog737MAX MarketValueofNewAircraft

Peak737-800Backlog

Peak737-8MAXBacklog

1,150+

737-800 Backlog and Deliveries

35

36

A320 Backlog and Deliveries

20.0

25.0

30.0

35.0

40.0

45.0

50.0

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

A320-200 Backlog A320-200 Deliveries A320N Backlog A320N Deliveries Market Value of New Aircraft (A320-200)

Num

ber o

f Airc

raft

US $M

Peak A320NEO Backlog

Agenda





Forecasting Value


37

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

$45.00

$50.00

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

2002 2006 2010 2014 Actual

Effectof9/11onAviationIndustry

TheGreatRecession

737-800 Future Base Value Accuracy (2002 Build)

38

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2002 2006 2010 2014 2018 Actual

39

A320-200 Future Base Value Accuracy (2002 Build)U

S $M

Source: mba REDBOOK, mba analysis

Effect of 9/11 on Aviation

Industry

The Great Recession

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

A320-200

737-800

Downcycle Downcycle andStalledRecovery

15%MarkettoBaseAdjustment

-15%MarkettoBaseAdjustment

Market to Base Adjustment Factor Cycle (5 Year Old Aircraft)

40

41

Narrowbody Volatility Study

AircraftYear of Manufacture

1995 2000 2005 2010

A318 a

A319 a a a a

A320-200 a a a a

A321-100 a a

A321-200 a a a

737-300 a

737-400 a

737-500 a

737-600 a a

737-700 a a a

737-800 a a a

737-900 a

737-900ER a

757-200 a a a

757-300 a

Average Future Base Value Projection Volatility

Notes: Included data within one standard deviation = 68.3% of the population sample

0%

2%

4%

6%

8%

10%

12%

14%

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

YOM2000 YOM2005 YOM2010

Aver

age

Vola

tility

Year of Value

Increased accuracy can be attributed to:

§ Manufacturers building assets more as commodities

§ Post 9-11 world sees aircraft differently as an asset class

42

Widebody Volatility Study

AircraftYear of Manufacture

1995 2000 2005 2010

A330-200 a a a

A330-300 a a a a

767-200ER a

767-300 a

767-300ER a a a a

767-400ER a

777-200 a a a

777-200ER a a a

777-200LR a

777-300 a a

777-300ER a a

Average Future Base Value Projection Volatility

Notes: Included data within one standard deviation = 68.3% of the population sample

Aver

age

Vola

tility

Year of Value

Increased accuracy can be attributed to:

§ Manufacturers building assets more as commodities

§ Whole industry sees aircraft differently as an asset class

0% 2% 4% 6% 8%

10% 12% 14% 16% 18% 20%

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

YOM2000 YOM2005 YOM2010

Agenda





Forecasting Value


43

44

General Narrowbody Market Outlook

§ Demand for narrowbody aircraft is at an all-time high, with backlogs at record numbers

§ Both Airbus and Boeing are currently ramping up production to meet increased demand

§ Several new market entrants are attempting to challenge the Airbus – Boeing duopoly

§ The average size of narrowbody aircraft is increasing, with large narrowbody aircraft becoming increasingly popular

§ Low oil prices are keeping previous generation aircraft in service longer than anticipated, buoying their residual values

§ Lease rates for new technology narrowbody are lower than expected

§ Narrowbody aircraft are increasingly being utilized on international medium-haul routes

§ The secondary market for narrowbody aircraft is stronger than that of widebody aircraft

§ Concern exists about bifurcation of fleets by engine type depressing values of some aircraft and engine combinations

45

General Widebody Market Outlook

§ Large widebody sales have been sluggish due to the young age of in-service fleets and potential oversupply

§ Four-engine aircraft are rapidly being replaced by twin-engine aircraft

§ Strong demand for the Boeing 787 and Airbus A350, both clean-sheet designs

§ Sales of the A330neo are slower than anticipated, with the A330-800neo currently eight on order to one operator

§ Low Cost Carriers (“LCCs”) are starting to buy widebody aircraft to operate long-haul routes

§ Boom in widebody fleet growth in the Arabian Peninsula unlikely to be sustainable

§ Market is softer for widebody aircraft than narrowbody aircraft

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Fundamentals of Aircraft Valuations - Aviation News