Fundamentals of Aircraft ValuationsAirline Economics School | Seoul, Korea 2019
Anne Correa, Vice President | Airline & Airport Services
mba helps leaders in all areas of the aviation industry solve some of their toughest problems and capture their greatest opportunity
Valuation Solutions
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Tangible Assets§ Aircraft§ Engines§ Spare Parts§ Ground Service
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Departure Slots§ International
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Business Units
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Due Diligence
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• IOSA• ISAGO
§ ACSF§ FSF§ BARS
Training§ Safety
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 is the Value of an Aircraft
What Factors May Impact Value
How to Manage Exposure
What are the Industry Trends
Forecasting Value
What Is the Current Market Outlook
10
11
Different types of exposure have an impact on the volatility and liquidity of an asset
Volatility&
LiquidityAircraft
Performance
MarketProspects
ProductionCycle
FinancingEnvironment
ExternalEnvironment
Different types of exposure have an impact on the volatility and liquidity of an asset
Volatility&
Liquidity
AircraftPerformance
MarketProspects
ProductionCycle
FinancingEnvironment
ExternalEnvironment
§ Specifications
§ Engines – Manufacturer & Thrust
§ Operating Weights
§ Cabin & Buyer-furnished equipment (BFE)
§ Technology
§ Family Affiliation
§ Regulation
Aircraft Performance Considerations are:
12
13
Different types of exposure have an impact on the volatility and liquidity of an asset
Volatility&
Liquidity
AircraftPerformance
MarketProspects
ProductionCycle
FinancingEnvironment
ExternalEnvironment
§ Order-books
§ Aircraft Placements
§ Operator Base
§ Geographic Penetration
§ Convertibility
§ Competitors
Market Prospects to Keep In Mind are:
14
Different types of exposure have an impact on the volatility and liquidity of an asset
Volatility&
Liquidity
AircraftPerformance
MarketProspects
ProductionCycle
FinancingEnvironment
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
FinancingEnvironment
ExternalEnvironment
16
2019 Welcomes a Strong Aircraft Financing Environment
Source: Boeing’s Current Aircraft Finance Market Outlook 2019
Volatility&
Liquidity
AircraftPerformance
MarketProspects
ProductionCycle
FinancingEnvironment
ExternalEnvironment
17
We are seeing more lessors and increased fragmentation over time
Source: Boeing’s Current Aircraft Finance Market Outlook 2019
Number of Lessors
Volatility&
Liquidity
AircraftPerformance
MarketProspects
ProductionCycle
FinancingEnvironment
ExternalEnvironment
18
Slower travel growth is expected, but still above trend
Volatility&
Liquidity
AircraftPerformance
MarketProspects
ProductionCycle
FinancingEnvironment
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
FinancingEnvironment
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
FinancingEnvironment
ExternalEnvironment
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
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
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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
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
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
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
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
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
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
Thank Youwww.mba.aero
Source: Boeing’s Current Aircraft Finance Market Outlook 201947