How is maintenance exposure impacting used aircraft values?
Asset Insight conducted a market analysis on June 30, 2017 covering 92 fixed-wing aircraft models, and 1,881 used aircraft listed ‘For Sale’. The analysis showed overall Maintenance Exposure to Ask Price Ratio (ETP Ratio) remained unchanged from May 30 at 54.8%. 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 of June 30, at 45.8% Turboprops returned the lowest (best) ETP figure for the third consecutive month, followed by Large Jets (48.6%). Small Jets were next (57.7%), as the only group to post an improvement, while Medium Jets worsened for the third consecutive month at 62.0%.
Most Improved Models
Except for the Gulfstream G-IV, all ‘Most Improved Models’ shown in the table above experienced a Maintenance Expense improvement, and all aircraft except for the Citation V 560 benefited from an Ask Price increase as well.
Of particular note is the dramatic improvement recorded by the Challenger 601-3A, having posted a 41.4% improvement this month, versus last month’s 8.8% degradation. The large upswing was due to a $402,229 decrease/improvement in Maintenance Exposure along with an average price increase of $300,000.
The 23.1% improvement of the Learjet 45XR is also worthy of note, as this was accomplished through a $33,828 Maintenance Exposure decrease/improvement, along with an astonishing $1.48m increase in average Ask Price.
Combined, the figures have moved this model’s ETP Ratio from 49.6% to 26.5%, potentially increasing its marketability. It remains to be seen if this will lead to a decrease in ‘Days on Market’, not to mention whether the sudden price increase is one that sellers are able to achieve in reality. Watch this space…
Most Deteriorated Models
All six aircraft listed under the ‘Most Deteriorated’ category experienced a Maintenance Exposure increase along with an Ask Price decrease. The two models of note are the Falcon 20-5 and the Challenger 601-1A.
While the Falcon 20-5 models listed ‘For Sale’ experienced an average Maintenance Exposure increase of $26,154, its effect on the model’s ETP Ratio was impacted more by a decrease of nearly $69k in the average Ask Price. For a model whose true value is probably well below the $1.4m average Ask Price, there is little opportunity for a significant ETP Ratio improvement.
Most Falcon 20-5 holders are well-aware they are likely to be the final owner of their aircraft, absent a purchaser seeking a disposable asset.
For similar reasons, the Challenger 601-1A did not fare well in our most recent statistical analysis, having experienced an average Maintenance Exposure increase of $23,828, along with an average Ask Price decrease in excess of $84k.
In contrast to the Challenger 601-3A (discussed above), the Challenger 601-1A’s average Ask Price was $854k lower, offering little hope for any useful ETP Ratio recovery. Where the Challenger 601-1A holds a distinct advantage over the 601-3A is in the Average Days on Market (109 versus 219) respectively. For disposable aircraft buyers focused on aircraft cabin size, the Days on Market statistic exemplifies their purchasing logic to buy the cheapest asset possible.
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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