1 / 36

Presented By: Shannon Ackert Vice President, Commercial Operations Jackson Square Aviation

Maintenance Status & Asset Values A Lessor’s Perspective. Maintenance Cost Conference. Presented By: Shannon Ackert Vice President, Commercial Operations Jackson Square Aviation October 20, 2011. Agenda. Factors Influencing Aircraft Values Maintenance Status

margo
Download Presentation

Presented By: Shannon Ackert Vice President, Commercial Operations Jackson Square Aviation

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Maintenance Status & Asset Values A Lessor’s Perspective Maintenance Cost Conference Presented By: Shannon AckertVice President, Commercial Operations Jackson Square Aviation October 20, 2011

  2. Agenda • Factors Influencing Aircraft Values • Maintenance Status • Aircraft Values from an Appraiser’s Perspective • Age and Value Performance • Market Conditions and Value Performance • Conclusions IATA Maintenance Cost Conference, Singapore October 20th, 2011

  3. 1. Factors Influencing Aircraft Values Broadly speaking, the factors that influence aircraft values be assigned into the following categories: • Manufacture • Market • Regulatory Jurisdiction • Aircraft Specific IATA Maintenance Cost Conference, Singapore October 20th, 2011

  4. 1. Factors Influencing Aircraft Values A. Manufacture • Pricing Strategy ; if OEM deep discounts persists, values will not return to their historical levels. • Production Rate ; high production rates can potentially create an oversupply & impair current values. • Manufacture Status ; demise of an OEM often contribute to ailing values of existing aircraft. IATA Maintenance Cost Conference, Singapore October 20th, 2011

  5. 1. Factors Influencing Aircraft Values B. Market Conditions • Market Outlook ; forecast of air traffic volumes and airplane demand - strong conditions translate into higher traffic growth and vice-versa. • Airline Profits ; strong correlation between profits & aircraft values (Profits values ) C. Regulatory Jurisdiction • Age Curfew ; many countries now have regulations on the maximum age an aircraft can have, which can have a negative impact on aircraft values. IATA Maintenance Cost Conference, Singapore October 20th, 2011

  6. 1. Factors Influencing Aircraft Values D. Aircraft Specific • Age; less stable as aircraft ages • Liquidity ; customer base & geographical distribution • Production Cycle ; long production runs are good, and early & late stages cycles are worse • Specification; weight, thrust, cabin configuration, winglets, and technology features • Family Variants ; aircraft families (737NG & A320) provide fleet & capacity planning flexibility. • Operating Economics ; payload, range, fuel burn, etc. • Secondary Market ;freighter conversions & part-outs • Maintenance Status IATA Maintenance Cost Conference, Singapore October 20th, 2011

  7. 2. Maintenance Status : User Context The context in which maintenance status is used depends on whom the constituents are. There are two: • Technical • Financial IATA Maintenance Cost Conference, Singapore October 20th, 2011

  8. 2. Maintenance Status : User Context • To technical constituents, maintenance status generally denotes an interval reference (i.e. FH, FC, calendar months, etc.) that is used to quantify where an event is in its maintenance cycle. Example interval reference: an engine’s maintenance status is stated as having : • 30,000 FH TSN / 15,000 FC TSN • 10,000 FH TSLSV / 5,000 FC CSLSV IATA Maintenance Cost Conference, Singapore October 20th, 2011

  9. 2. Maintenance Status : User Context • To financial constituents, maintenance status generally denotes a value reference that is directly correlated to the life remaining of certain high cost maintenance events. Example value reference: an aircraft’s maintenance status is stated as being at : • Half-life • Above or Below half-life • Full-life IATA Maintenance Cost Conference, Singapore October 20th, 2011

  10. 2. Maintenance Status : Maintenance Events Aircraft market values are adjusted for deviations in the maintenance status of high cost maintenance events consisting of: • Airframe Heavy Structural Inspections • Landing Gear Overhauls • Engine Performance Restoration • Engine LLP Replacement • APU Performance Restoration IATA Maintenance Cost Conference, Singapore October 20th, 2011

  11. 2. Maintenance Status : Maintenance Utility Maintenance status is used to quantify, in whole of part, the value of maintenance utility remaining. The key to quantifying maintenance status lies in making accurate assessment as to: • Where each maintenance event is relative to their last and next shop visit, and • What percentage of its next / upcoming shop visit cost is remaining. IATA Maintenance Cost Conference, Singapore October 20th, 2011

  12. 2. Maintenance Status : Utility Profiles • Hard-time – maintenance events that generally have 100% of their values decline to zero & subsequently recapitalized to full value after each check. Hart-time Utility Curve Full-life 100% Calendar Based Events: Airframe HSI LG Overhaul Half-life 50% 0% 1 - Hard-Time - Maintenance Utility Profile EIS 1st SV 2nd SV 3rd SV IATA Maintenance Cost Conference, Singapore October 20th, 2011

  13. 2. Maintenance Status : Utility Profiles • Quasi Hard-time- applicable to engine LLPs whereby a portion of their hard-time lives are discarded, i.e. generally 5% -15% depending on the engine type. Hart-time Utility Curve Full-life 100% Exception: Engine LLPs LLPs are replaced with stub lives remaining Half-life 50% LLP Green Time 0% 1 - Hard-Time - Maintenance Utility Profile EIS 1st SV 2nd SV 3rd SV IATA Maintenance Cost Conference, Singapore October 20th, 2011

  14. 2. Maintenance Status : Utility Profiles C. Condition-monitor– maintenance events that rarely have 100% of maintenance consumed, and the event’s workscope often only partially restores the value lost. Condition-Monitor Utility Curve Full-life 100% OC / CM Based Events: Engine PR APR PR Half-life 50% 0% EIS First SV Second SV Third SV IATA Maintenance Cost Conference, Singapore October 20th, 2011

  15. 2. Maintenance Status : Financier Terms Aircraft appraisers use, as a baseline reference, two industry-standard terms to represent an aircraft’s maintenance status: • Full-life– the full-life status implies each major maintenance event has just been fully restored to zero-time condition. • Half-life– the half-life status implies that each major maintenance event is half-way between overhaul / restoration. IATA Maintenance Cost Conference, Singapore October 20th, 2011

  16. 2. Maintenance Status : Valuation Concepts Example : 737-800 Full & Half-life Valuations Phase : First-Run IATA Maintenance Cost Conference, Singapore October 20th, 2011

  17. 2. Maintenance Status : Valuation Concepts Adjustment from half-life reflects deviations from half-life. The deviations ($) are either positive or negative depending on the status of the maintenance event. Example A : Half-life Calculation - 737-800 / 8-Yr SI Check Adjustment from Half-life ($) = (% Life Remaining - 50%) * (Mtx Event Cost) • 8-Year Interval = 96 months • 8-Year Life Remaining= 24 months • 8-Year SI Cost = $780,000 Adjustment from Half-life ($) = (25% - 50%) * $780,000 = ($195,000) IATA Maintenance Cost Conference, Singapore October 20th, 2011

  18. 2. Maintenance Status : Valuation Concepts Example A : Adjustment from half-life graphical Illustration: Consumption Rate = $8,125 / Mo 100% Deviations from Half-life Factored as a notional credit if above half-life $195,000 75% Assumes no $ Adjustment Half-life 50% Factored as a notional offset if below half-life ($195,000) 25% 0% 24 Mo 48 Mo 72 Mo 96 Mo IATA Maintenance Cost Conference, Singapore October 20th, 2011

  19. 2. Maintenance Status : Valuation Concepts Example B : Half-life Calculation - 2006 Build 737-800 Aircraft IATA Maintenance Cost Conference, Singapore October 20th, 2011

  20. 2. Maintenance Status : Valuation Concepts Example B : Adjustment from half-life graphical Illustration: Aircraft : B737-800 Operation : 3,500 FH 2,000 FC 1.7 FH:FC Engine : CFM56-7B26 Derate : 10% 100% Consumption Rate = $125,000 / Mo ENG SV 1 Deviation from Half-life 75% 50% ( $2,084,333 ) 25% APU SV1 APU SV2 0% 0 10 20 30 40 50 60 70 80 IATA Maintenance Cost Conference, Singapore October 20th, 2011

  21. 2. Maintenance Status : Valuation Perspective In the real world it is common to make financial adjustments to account for bothan aircraft’s condition and maintenance status. Condition tends to be a judgment call - if an aircraft has scab patches, is dirty, dripping fluids, and has a lot of deferred maintenance items, it is not uncommon to assign a lower value to this aircraft. In most cases however, an aircraft’s condition, as opposed to its maintenance status, would not warrant a significant change in an appraiser’s standard value opinion. IATA Maintenance Cost Conference, Singapore October 20th, 2011

  22. 3. Aircraft Values : Appraisal Terms & Concepts The standard aircraft value terms used by investors & appraisers are defined by the International Society of Transport Aircraft Trading (ISTAT). Key values are : • Base Market Value • Current Market Value • Adjusted Market Value • Future Base Value A. Base Market Value– represents the opinion of the value of a single aircraft in a single arms-length transaction in a balanced market, unaffected by short-term events. Base value assumes an aircraft’s maintenance status is at half-life. IATA Maintenance Cost Conference, Singapore October 20th, 2011

  23. 3. Aircraft Values : Appraisal Terms & Concepts B. Current Market Value – represents an appraiser’s opinion of the most likely trading price that may be generated for a single asset under market conditions that exist at that time. Current market value assumes an aircraft’s maintenance status is at half-life. Example: CMV = BV : market conditions are in equilibrium. CMV > BV : market conditions are tending to support higher prices. CMV < BV : market conditions are tending to support lower prices. Base Value Current Market Value IATA Maintenance Cost Conference, Singapore October 20th, 2011

  24. 3. Aircraft Values : Appraisal Terms & Concepts C. Adjusted Market Value – indicates that the market or base value of the aircraft has been adjusted from half-life to account for the actual maintenance status: Adjusted Market Value ($) = Market Value + Adjustment from Half-life • Base Value = $31,500,000 • Half-life Adjustment = ($2,084,333) • Adjusted BV = $29,415,667 • Current Market Value = $32,700,000 • Half-life Adjustment = ($2,084,333) • Adjusted CMV = $30,615,667 IATA Maintenance Cost Conference, Singapore October 20th, 2011

  25. 3. Aircraft Values : Appraisal Terms & Concepts D. Future Base Value – is the appraiser’s forecast of future aircraft values from an initial starting point that is generally its base value. Age IATA Maintenance Cost Conference, Singapore October 20th, 2011

  26. 4. Age & Value Performance : Terms & Concepts Age implications to maintenance status; as the aircraft ages so does it’s corresponding Direct Maintenance Costs (DMC). The aging process can be categorized into maintenance phases: Mature-run Phase Begins after the newness phase and runs through the first maintenance cycle. Aging-run Phase Begins after the end of the first maintenance cycle when the effects of airframe age result in higher non-routine maintenance costs. First-run Phase All maintenance events have yet To occasion their first shop visit EIS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Year of Operation IATA Maintenance Cost Conference, Singapore October 20th, 2011

  27. 4. Age & Value Performance : Terms & Concepts Example : 737NG Maintenance phases : 3% annual inflation Mature-run Phase Aging-run Phase First-run Phase IATA Maintenance Cost Conference, Singapore October 20th, 2011

  28. 4. Age & Value Performance : Terms & Concepts Age implications to aircraft values; as the aircraft ages it’s value decreases and becomes more volatile. The aging process can be categorized into value phases: New / In-production Aircraft Aging / Out of Production Aircraft 60% 50% Relative Volatility 40% 30% 20% 10% 0% -10% -20% -30% -40% CMV as a % BV -50% -60% Year of Operation IATA Maintenance Cost Conference, Singapore October 20th, 2011

  29. 4. Age & Value Performance : Terms & Concepts Influence of Age & Maintenance Status on Aircraft Values As an aircraft ages, maintenance accounts for a higher proportion of the aircraft’s total value IATA Maintenance Cost Conference, Singapore October 20th, 2011

  30. 4. Age & Value Performance : Terms & Concepts As the aircraft agesthe proportion of maintenance status value tends to be largely concentrated in the engines. 100% 90% AIRFRAME 80% 70% 60% 50% Percentage of Original Aircraft Value 40% 30% ENGINE 20% 10% 0% 0 Time - Years 20 IATA Maintenance Cost Conference, Singapore October 20th, 2011

  31. 4. Age & Value Performance : General Rule Often, if an aircraft’s overall maintenance status is determined to be: • Above half-life - buyers rarely pay seller dollar-for-dollar for the premium above half-life • Below half-life - buyers will demand dollar-for-dollar impairment for the value below half-life. And hence the importance of maintenance status forecasting IATA Maintenance Cost Conference, Singapore October 20th, 2011

  32. 4. Age & Value Performance : Terms & Concepts Maintenance Status Forecasting Aircraft : B737-800 Operation : 3,500 FH 1,750 FC 2.0 FH:FC Engine : CFM56-7B26 Derate : 10% IATA Maintenance Cost Conference, Singapore October 20th, 2011

  33. 4. Age & Value Performance : Terms & Concepts Theoretical Optimal Aircraft Trading Period Aircraft : B737-800 Operation : 3,500 FH 1,750 FC 2.0 FH:FC Engine : CFM56-7B26 Derate : 10% Optimal Trading Period Optimal Trading Period Optimal Trading Period IATA Maintenance Cost Conference, Singapore October 20th, 2011

  34. 5. Market Conditions & Value Performance In a balanced market, an aircraft sold in half-life assumes no profit or loss results from maintenance status. In reality both aircraft and maintenance status values can swing dramatically depending on supply & demand. IATA Maintenance Cost Conference, Singapore October 20th, 2011

  35. 6. Conclusions • The value of maintenance status is rarely constant; volatility of markets inherently translates into volatility of both aircraft & maintenance status valuation. • After an aircraft reaches a certain age the maindifferentiator between specific aircraft of the same vintage will often be the value in their maintenance status. • Obtaining dollar-for-dollar premium for maintenance status is rarely achieved, therefore traders should account for an optimal trading period that considers the age of the aircraft as well as the status of major maintenance events. IATA Maintenance Cost Conference, Singapore October 20th, 2011

  36. 6. Conclusions - Continued iv. Whereas an airframe gradually deteriorates over time, appropriate maintenance can repetitively restore an engine to a near new condition and value. Therefore, engine maintenance status needs to be carefully monitored given its influence on aircraft market values. v. In forecasting maintenance status, the operational profile, airframe age, and inflation rate should be considered as an integral part of the methodologies used to assess the value of maintenance. IATA Maintenance Cost Conference, Singapore October 20th, 2011

More Related