Jetrader - July/August 2010 - 15

Appraisal Methodology 101
Commonalities, differences both part of the equation
By Dr. Stuart Hatcher, Head of Valuations & Modelling, IBA Group Ltd., ISTAT Certified Appraiser

A
The Deﬁnitions

Value

As the market continues to speculate whether we have reached the bottom of the worst economic cycle in 80 years, the ﬁnancial, leasing and manufacturing communities are more reliant than ever on the opinions of the ISTAT Certiﬁed Appraisers. The key concern of clients is now focused upon volatility and consistency. Appraisers have received much criticism on these two important areas in recent years, and the focus of this article is to highlight the common ground that exists between appraisers and the reason for some of the perceived differences. A strong appraisal community provides a mindset that is constantly challenging the way we view the key drivers of the market and better predict what will happen in the short, medium and long-term. While each appraiser or appraisal ﬁrm will have a slightly different view on the best way to do this, there is some common ground that exists, which is drawn out by the ISTAT-deﬁned terms as set out in the Appraisers’ Handbook. The most ubiquitous of these terms are Base Value and Market Value, which constitute the vast majority of appraisals performed by ISTAT appraisers. These terms are well-known now by practically all involved in this industry, but I will use them here to highlight the key methodology used by ISTAT Certiﬁed Appraisers.

use.’ An aircraft’s Base Value is founded in the historical trend of values and in the projection of value trends and presumes an arm’s-length, cash transaction between willing, able and knowledgeable parties, acting prudently, with an absence of duress and with a reasonable period of time available for marketing.” “Market Value is the Appraiser’s opinion of the most likely trading price that may be generated for an aircraft under the market circumstances that are perceived to exist at the time in question. It assumes the aircraft is valued for its highest, best use, that the parties to the hypothetical sale transaction are willing, able, prudent and knowledgeable, and under no unusual pressure for a prompt sale, and that the transaction would be negotiated in an open and unrestricted market on an arm’s length basis, for cash or equivalent consideration and given an adequate amount of time for effective exposure to prospective buyers.”
(Source: ISTAT Appraisers’ Handbook, www.ISTAT.org)

These concepts are better illustrated with a graph depicting the life of an aircraft, as shown below. When the market is strong for the type, the value is above the base line, whereas when the market is poor for the type, the value is below the base line. When the market is balanced, the lines cross. Market Values point to the condition of the market, while Base Values assume the market is balanced. What the deﬁnitions don’t speciﬁcally mention is the effect of the value associated with the maintenance condition. In most cases, and unless otherwise stated, published values that fall under these deﬁnitions typically consider that the aircraft is in a physical condition deemed as average for its type and age, and all maintenance status’ are mid-time, mid-life or beneﬁting from an above-average maintenance status if new or nearly new. In reality, it is quite difﬁcult to ﬁnd an aircraft that

Generic Base and Market Cycle
100 90 80 70 60 50 40 30 20 10 0 Base Value Market Value

“Base Value is deﬁned as the Appraisers opinion of the underlying economic value of an aircraft in an open, unrestricted, stable market environment with a reasonable balance of supply and demand, and assumes full consideration of its ‘highest and best

Time or Age

Jetrader 15
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Jetrader - July/August 2010

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