Jetrader - Spring 2017 - 37
Manufacturers' new list prices are not
indicative of actual prices paid. During the
past 20 years, the list prices have increased
at a far higher rate that actual sale prices.
While, in the 1990s, the discount from list
price for a typical sale might have been
10 percent to 15 percent, it now may be
45 percent to 55 percent, or even more. List
prices are linked into aircraft manufacturers' price escalation models that prior to
delivery adjust upwardly the delivered price
of aircraft on order, so the gap between list
prices and actual prices likely will continue
Future Values and
Forecasting future aircraft values has
its unique set of challenges. The gradual
decline in an aircraft's value is due to age
as it becomes less economically competitive compared with newer, more advanced
technology and competing aircraft, but this
does not tell the whole story.
While the computer models used by most
appraisers seek to address the declining
value of the aircraft as it ages, typically
such models do not model the future of the
macro-economic environment in which the
aircraft will be operating and competing.
Such econometric modeling is highly complex and has all the challenges of crystal
ball gazing and high-level quantitative
analysis. The challenge of incorporating
macro-economic changes is highlighted by
the macro-economic changes experienced
since the year 2000.
Between 1999 and 2016, the cost of a
U.S. gallon of aviation fuel has gone from
around $1 to more than $4 and back down
to under $2. Fuel price is the economic
input that most directly impacts airline
profitability, aircraft fleet decisions, the
relative competitiveness of aircraft models
and aircraft values, with higher fuel prices
having a more negative value impact on
older, less-fuel-efficient aircraft. These huge
variances in fuel prices were not foreseen
in the manufacturers' demand forecasts.
ISTAT member and commercial aviation guru
Dr. Adam Pilarski predicted the market price
of a barrel of oil would fall to $40.
When fuel cost is high, the fuel cost savings of the most fuel-efficient, new aircraft
can be a significant offset against the high
capital cost of those new aircraft. As fuel
prices decline, the magnitude of the capital
cost offset resulting from fuel price savings
declines proportionately, making the higher
capital cost of new aircraft relatively economically less attractive and older, less fuel
efficient aircraft economically more attractive. A real-world example is that as fuel
prices declined from July 2012, many lessors experienced their customers extending
leases on older aircraft they had intended
to sell or retire when the leases ended.
In addition, the costs of labor, materials
and regulatory costs can impact the future
value of aircraft.
Aircraft Unit Costs
Within a size category, similar aircraft
compete with one another. There is a
combination of fixed costs and operating costs that result in unit costs per
aircraft-kilometer/mile and unit costs per
revenue seat (or tonne) kilometer/mile. At
a set level of aircraft utilization, which
is the key independent variable, aircraft
unit costs can be compared on an applesto-apples basis to determine what aircraft
has a competitive economic advantage or
disadvantage. Generally speaking, the aircraft with the best fully allocated unit
costs wins the competition in that size
category with values and economic life
reflecting such economic advantage.
Comparative economic analysis is a wellfounded consideration when an appraiser
is developing an opinion of value.
Value of Aircraft Performance
While improved fuel efficiency of newer
aircraft models has the greatest direct
impact on improved aircraft performance
and value, value also resides in weightrelated and technology-related impacts
on aircraft performance.
Aircraft operators are willing to pay
for size, weight, power and range, all of
which can directly impact operations,
Jetrader * Spring 2017 37