Jetrader - July/August 2010 - 16

Maintenance Cost Volatility on Base Value
100% True Half-Life 90% 80% 70% Zero-Life Full-Life Base Value

60% 50% 40% 30% 20% 10% 0% 0 1 2 3 4 5 6 7 8 9 10 11 12 Age 13 in 14 Years 15 16 17 18 19 20 21 22 23 24 25

ﬁts this description accurately, so it requires the appraiser to make the necessary adjustments to ﬁt the values to the given situation. The volatility around a base curve when dealing with these maintenance conditions are illustrated in the graph above. Ultimately it varies between zero-life and full-life which, depending on the aircraft, can vary considerably. Both value deﬁnitions are slightly idealized, but they provide the appraiser and client with a benchmark from where adjustments can be made to better reﬂect the speciﬁc transaction under analysis. These are the most commonly used value deﬁnitions, and they complement one another well. Apart from the market differences, all other considerations are equal, and therefore it provides the client with an “apples to apples” comparison of how the asset is performing at a speciﬁc time.

unpopular type which serves no strong market demand, will have a short and shallow life. These three factors are determined by the trading activity and relative interpretation of each transaction, which also determine the Market Value. In all cases where trading data exists, a data point can be determined. This data point constitutes the realized price from the trade. If the nature of the transaction is known, then the appraiser can cleanse the data to take some speciﬁc price drivers out of the equation in order to better reﬂect the Market Value deﬁnition and therefore enable the appraiser to compare it directly with other data points. These adjustments normally consist of maintenance condition adjustments, operating lease conditions, multi-aircraft sales, additional spare parts/engines included, unusual new price discounts, inﬂ ation, etc. Eventually, the appraiser will be able

to build a picture of trading activity over time. In a perfect world, the appraiser will be armed with a large set of data that will produce a large (yet tight) scatter plot that evolves more than at least one full market cycle. In reality, the appraiser will normally ﬁnd lots of points for one highly traded type, e.g., 737-300, and practically zero points for some large relatively new ﬂeets that have yet to trade, e.g., a 777-300ER. In these cases, it is often necessary for the appraiser to group data into an asset class to look at the bigger picture. The quanta are not relevant, but the percentage changes year on year with respect to delivery price can be a useful method to determine a trend. Once the plot has been built and the analysis units have been determined (percent of delivery price, Delivery US$, etc.), then the analysis to determine the Base Value curve and Market Value spread can begin. The most common method is to ﬁt a curve that best describes the spread of data. Depending on the spread and number of points available, the conﬁdence limits can be determined, and the new Base Value curve can be set within these points. It is also important to note that depending on the data points plotted, market driven aspects can be normalized as well. For example, if you plot all trades for all A320s and 737NGs “v” age, then the speciﬁc peaks and troughs will be normalized out. If you only analyze aircraft of a speciﬁc year of build, then the movements will remain evident.

The Process of Determining Market and Base
The way in which different appraisal ﬁrms derive their base curves and deduce their Market Values are also relatively close in theory. A Base Value curve has three major factors to consider: a start point, an endpoint and a shape. The start point is derived from delivery pricing (adjusted for multi-sale or unusual client-speciﬁc credits), the end point (also known as the end of economic useful life) indicates the lowest point of depreciation, and the shape is driven by the general market acceptance for the type. A highly liquid type will have a strong proﬁle and long life, where as an
Single Year of Build Scatter Plot Curve Fit
120%

Value as % of New

100%

80%

% Value

60%

40%

20%

0% 0 5 10 15 20 25

Age in Years

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

Jetrader - July/August 2010

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