How is used jet maintenance exposure impacting aircraft values?
Asset Insight conducted a market analysis on July 31, 2017 covering 92 fixed-wing aircraft models, and 1,859 aircraft listed ‘For Sale’. The analysis showed overall Maintenance Exposure to Ask Price Ratio (ETP Ratio) improved from last month’s 54.8% to 52.5%. Tony Kioussis explains…
The Exposure to Price Ratio (ETP Ratio) calculates an aircraft's maintenance exposure as it relates to the ask price. This is achieved by dividing an aircraft's Maintenance Exposure (the financial liability accrued with respect to future scheduled maintenance events) by the aircraft's Ask Price.
The ETP Ratio is a useful indicator of an aircraft’s marketability. ‘Days on Market’ analysis has shown that when the ETP Ratio is greater than 40%, a listed aircraft’s Days on Market increases (in many cases by more than 30%). So, for example, aircraft whose ETP Ratio exceeded 40% during Q2 2017 were listed ‘For Sale’ an average 52% longer than aircraft whose Ratio was below 40% (319 versus 211 Days on the Market respectively).
Accordingly, as the ETP Ratio decreases, the asset's value increases (in relation to the aircraft's price).
As July drew to a close, Large Jets returned the lowest (best) ETP figure at 40.8% – a 16% improvement over last month’s figure, followed by Turboprops (46.5%) – the group posting the best ETP Ratio during the previous three months. Small Jets were next (57.3%), while Medium Jets improved to 60.7%, following three consecutive monthly increases.
Most Improved Models
All ‘Most Improved Models’ shown in the Table A experienced a Maintenance Exposure improvement, and that reduction was even sufficient to overcome an average Ask Price decrease in the case of the Challenger 601-1A and the MSG3-maintained GIV-SP.
The Bombardier Challenger 601-1A rose to best performer in July, posting a 31.3% ETP Ratio improvement after posting the second worst degradation among all tracked aircraft during June. The large upswing was primarily fueled by a $471,858 decrease/improvement in Maintenance Exposure, which overcame a $20,000 price decrease.
The Gulfstream GIV-SP traded its position as June’s fifth worst performer to become July’s fifth best performer.
It did so by recording a $1.556m Maintenance Exposure improvement while the model’s average Ask Price remained unchanged. Similarly, the GIV-SP operated under the MSG3 maintenance standard, occupied July’s third best position, posting a $1.248m improvement in Maintenance Exposure that easily overcame a $50,000 drop in Ask Price
While Maintenance Exposure figures are objective calculations, whether or not any Ask Price increase can be realized in the aircraft’s final transaction value is unknown. Accordingly, decreases in Maintenance Exposure dollars are better indicators of aircraft marketability than a desired price figure.
Most Deteriorated Models
All six aircraft listed under the ‘Most Deteriorated’ category experienced a Maintenance Exposure increase, while two were also negatively impacted by an Ask Price decrease.
The Cessna Citation V earned its worst performer position by registering a July Maintenance Exposure increase of $127,031, while concurrently posting an average Ask Price decrease in excess of $60,000. For an aircraft model valued, at best, around one million dollars, the average aircraft’s Maintenance Exposure is about 70% of the average Ask Price. Still, the aircraft has a certain following and that has kept its Days on Market reasonably low.
The Beechcraft King Air C90 turboprop market has been challenging sellers.
The aircraft’s average Maintenance Exposure has been exceeding the model’s Ask Price, and that was further exacerbated in July by another $35,344 Maintenance Exposure increase. The model also suffered a relatively small Ask Price decrease, but when the average King Air C90 is valued at no more than $500k, a price decrease of only $3k coupled with the current Maintenance Exposure increase, explains why such aircraft are averaging 1.75 years to resell.
Lastly, the Dassault Falcon 20-5 went from worst performer in June to just ‘making the cut’ in July. While Ask Prices held steady, the news is not as positive as it might seem since the model’s achievement came through a $44,000 Maintenance Exposure increase. At basically twice the aircraft’s value, sellers are likely to overcome the Maintenance Exposure issue only if they are able to locate a ‘disposal aircraft’ buyer.
A Word to the Wise Seller…
It is important to understand that the ETP Ratio has more to do with buyer and seller dynamics than it does with either the asset’s accrued maintenance or its price. For any aircraft, maintenance can accrue only so far before work must be completed. But as an aircraft’s value decreases, there will come a point when the accrued maintenance figure equates to more than 40% of the aircraft’s Ask Price.
When a prospective buyer adjusts their offer to address this accrued maintenance, the figure is all too often considered unacceptable to the seller and a deal is not reached.
It is not until an aircraft undergoes some major maintenance that a seller is sufficiently motivated to accept a lower figure, or a buyer is willing to pay a higher price and the aircraft transacts, ultimately.
The wise seller will carefully weigh the offer of a buyer against the loss in value of their aircraft ‘For Sale’ as the asset spends more days on the market awaiting a better offer and simultaneously accruing a higher maintenance figure.
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