Jetrader - Summer 2017 - 40

ISTAT appraisers' education project

Aircraft Econo
By Neil Whitehouse, Senior Appraiser. Editor and Contributor: Jack Feir, Appraiser Fellow and Member Emeritus

This is the third article in
the ISTAT appraisers' education
project, which focuses on
aircraft economic life, fleet
life and retirement. Aircraft
economic life is one of the
most hotly debated issues in
our industry and appraisers
must be educated when forming
value opinions. Retirement
is more complex than it
may at first appear.

A commercial aircraft, like any industrial
capital asset, exists to generate revenues
and a return on investment to the owner and
operator, which justifies the owner's investment and the attendant investment risks. A
commercial aircraft's ability to earn its keep
and perpetuate its economic life directly
relates its economic competitiveness.
As aircraft age they become more expensive to operate and become less competitive. While newer aircraft typically burn less
fuel and require less maintenance, these
positives are balanced against burdensome
capital costs. Older aircraft are, in virtually
all cases, less fuel-efficient and require
more maintenance, and have lower dispatch
reliability and on-time performance rates,
which are revenue-related.
A definitive endpoint of an older aircraft's economic life occurs when - with

zero capital cost (with an implicit current market value of zero dollars) - its
operating costs exceed the fully allocated
unit costs (operating and capital costs) of
directly competing aircraft. At this point,
an aircraft has lost its basic economic rationale for existence as a viable, operating
industrial capital asset.
An aircraft appraiser's opinion of the
economic life of a given aircraft model will
directly impact the appraiser's analysis of
future values. The longer the economic life
assumption, the more gentle the decline of
the value curve, reflecting higher values
along its path over time than would be the
case with a shorter economic life.
Assumptions regarding aircraft economic life have varied over time. In
1969/1970, the first Pan-American World
Airways and United Airlines Boeing
747-100 aircraft had an assumed 15-year
economic life. By the 1990s there was
a general sense that aircraft economic
lives were extending, and an assumption
of 30-year life for a narrow-body aircraft
was not unusual. Technological evolution
combined with the extensive availability
of aircraft through operating lessors, and
significantly higher new aircraft production rates have combined to put downward
pressure on aircraft economic life. This is
an enthusiastically debated issue, with

40 The official publication of the International Society of Transport Aircraft Trading

manufacturers arguing there is no diminution of economic life while market activity
suggests there is.
Since the 1980s, many operating lessors have used a depreciation policy on the
order of 25 years to a 15 percent residual.
However, in recent years, lessors have found
that parting out middle-aged aircraft can
be the best asset management option to
optimize returns, particularly when confronted with the need to reinvest heavily in
airframe and engine maintenance in order
to re-lease aircraft.
Aircraft economic life for widebody aircraft may be different than for narrowbody
aircraft and, as noted, assumptions regarding economic life are not static but evolve
over time. In 2016, the largest Airbus A380
operator, Emirates, has announced it will
"sit down" Airbus A380 aircraft after
13 years in service. The secondary market
for Airbus A380's has yet to be identified.
At the same time, the carbon fiber Boeing
787 airframe should not be subject to the
corrosion and aging aircraft maintenance
issues of traditional aluminum alloy airframes that can end an aircraft's economic
life with burdensome overhaul costs. Time
will tell how long Boeing 787 aircraft will
remain economically viable, particularly
as engines and avionics can be upgraded
to remain competitive.

Jetrader - Summer 2017

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