Jetrader - Winter 2017 - 43

for example 60 days, 90 days or six months
as the needs may be. Apart from the fact
that the seller is uncommonly motivated,
the parties to the transaction are otherwise
assumed to be willing, able, prudent and
knowledgeable and negotiating at arm'slength, normally under the market conditions
that are perceived to exist at the time, not
an idealized balanced market.

Comment: Distress Value
The circumstances of distress value tend
to occur most often when there are problems relating to the sale of an aircraft and
to close a deal the seller has to accept a
deeply discounted price. Only on rare occasions will a buyer be distressed and be so
desperate as to purchase an aircraft and
have to pay a significant premium over
current market value.
The most often occurring distressed sale
circumstances involve financial problems.
An owner may need to quickly generate
cash, an airline may become insolvent and
flood the market, or an aircraft may be
auctioned off. These situations can result in
distressed sales at deeply discounted prices.

Securitized Value of
Lease-Encumbered Value
Securitized value or lease-encumbered
value encompasses both the appraiser's
opinion of the value of the lease stream
and the present value of the aircraft at the
end of the lease.

ISTAT Definition: Securitized
Value of Lease-Encumbered Value
Securitized value or lease-encumbered
value is the appraiser's opinion of the value
of an aircraft, under lease, given a specified
lease payment stream (rents and term), and
estimated future residual value at lease termination and an appropriate discount rate.

Comment: Securitized Value of
Lease-Encumbered Value
The securitized value or lease-encumbered
value of an aircraft may be more or less than
the appraiser's opinion of current market
value. When estimating the discount rate
to apply to the lease rental stream and the
aircraft's residual value, the appraiser must
consider the impact of inflation and the
credit and technical risks that are inherent
in an aircraft being leased to an operator
for many years. The lessor, or debt provider,

is dependent on the quality of the lease
documentation and the longevity and the
compliance disposition of the lessee years
into the future, through to and beyond the
end of the lease until the aircraft is returned
in the contractually agreed condition.

ISTAT Definition: Residual Value
Residual value is the value of an aircraft,
engine or other item at a future date, often
used in connection with the conclusion of
a lease term.

Salvage Value
(or Parting-Out Value)
The most often wrongly used aircraft value
terminology is the use of "Scrap Value" in
place of Salvage Value or Parting-Out Value.

ISTAT Definition: Salvage Value
(or Parting-Out Value)
Salvage Value is the actual or estimated
selling price of an aircraft, engine or major
assembly based on the value of marketable
parts and components that could be salvaged
for re-use on other aircraft or engines. The
value should be determined and stated in
such a way to make clear whether it includes
adjustment for removal costs. Salvage Value
is not the same as Scrap Value.

Comment: Salvage Value
(or Parting-Out Value)
At a point in time, the value of an aircraft as a potential inventory of spare
parts exceeds its value as an operating
commercial aircraft. At that moment the
value basis of the aircraft is irrevocably
changed. The asset is no longer valued as an
operating machine that generates revenues
transporting people and/or freight by air. It
has qualitatively and irrevocably changed.
To realize the retail market value of individual parts and assemblies, the aircraft
must be purchased and disassembled. Parts
must be tagged, inventoried, stored, marketed, listed on the internet, sold, packed,
shipped and invoiced. To accommodate the
cost of these activities and to generate a
profit, an aircraft has to be purchased at
a wholesale price.
The wholesale salvage or parting-out
value of the aircraft may be less than the
value of the engines. Therefore, the life
and time status of the engines, the engine
full power runs and borescope inspection
and the quality and completeness of the

records and, in particular, the LLP records
back to birth are critical components of an
engine's value.

Scrap Value
Scrap metal is scrap metal. It is not an
aircraft or anything in particular.

ISTAT Definition: Scrap Value
Scrap value is the actual or estimated
market value of an aircraft, engine or major
assembly based solely on its metal or other
recyclable material content with no saleable
reusable parts or components remaining. The
scrap value is usually expressed as net of
removal and disposal costs. In some cases
scrap value could be zero if the dismantling
and disposal costs are high, as for example
hazardous materials or composite assemblies
that might be impossible to recycle.

Comment: Scrap Value Comment
Scrap may comprise metal that used to
be aircraft parts or old washing machines,
or whatever, because it refers not to the
former use of metal, but the metal itself.
The metal remnants of what used to be
the structure of an aircraft are typically
sold for scrap after any useable parts have
been removed and waste materials, such as
cabin lining materials and seat cushions,
have been discarded.
An aircraft hulk is typically sold for
little or nothing, because the economics of scrapping metal is that the scrap
merchant's cost to cut up and remove the
metal and a reasonable profit leave little
or no room to pay anything for the hulk.
Aircraft grade aluminum alloy is used for
automobile wheels, beer cans and, more
recently, Ford pick-up truck bodies.
Aircraft parts, which are manufactured
using composite materials  - including
carbon fiber - present a disposal challenge
and are subject to the European Union's
End-of-Life Vehicle Directive, issued in
2000. Carbon fiber can be recycled, but
currently costs about double the cost of
virgin carbon fiber granules, so carbon fiber
content may increase the cost of disposal
of aircraft scrap.

REFERENCES

1. ISTAT Appraisers' Handbook, Originated: 1985-04-14,
Revision #7, 2013-01-30
2. APUs are generally, "on condition" and are run to
failure. The maintenance interval is the estimated
time between failure.

Jetrader * Winter 2017 43
Jetrader - Winter 2017

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