How is maintenance exposure impacting used aircraft values?
Asset Insight conducted a market analysis on May 30, 2017 covering 92 fixed-wing aircraft models, and 1,914 aircraft listed ‘For Sale’. The analysis showed overall Maintenance Exposure to Ask Price Ratio (ETP Ratio) deteriorated to 54.8% (last month’s Ratio was 54.1%). 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 Q1 2017 were listed ‘For Sale’ an average 65% longer than aircraft whose Ratio was below 40% (334 versus 203 Days on the Market respectively).
Accordingly, as the ETP Ratio decreases, the asset's value increases (in relation to the aircraft's price).
For May, at 45.6% Turboprops returned the lowest (best) ETP figure for the second consecutive month (this was the only group to post an improvement), followed by Large Jets (47.1%). Small Jets were next (59.8%), while Medium Jets continued to worsen at 61.5%.
Most Improved Models
All ‘Most Improved Models’ shown in the Table A experienced a Maintenance Expense improvement with the Citation V 560, King Air 300, and Citation CJ1+ also benefiting from an Ask Price increase.
The ask price for the Beech 1900C remained unchanged, while the Bombardier Global Express and Citation Bravo’s ETP Ratio improved despite a slight price decrease.
The main reason for dramatic changes in ETP Ratio (as seen in the Global Express this month) could owe to aircraft turnover (i.e. aircraft being sold and new aircraft being listed).
Improvement in the ETP Ratio can be caused by higher quality assets entering the market, along with new sellers who believe their aircraft is worth more than it may actually be worth. By listing their asset at a higher Ask Price, these sellers can improve the ETP Ratio (sometimes dramatically) for that make/model. If this is the case with the Global Express it is unlikely to last long, and the ETP Ratio for that model will settle once “pricing reality” comes into focus.
On the whole, maintenance moves too slowly to create any great movement in the ETP Ratio (although it can happen if there are few aircraft listed ‘For Sale’ and one or two go through one or more major inspections).
Most Deteriorated Models
Four of the six aircraft listed under the ‘Most Deteriorated’ category experienced a Maintenance Exposure increase, with the Gulfstream GIV and Challenger 601-3R registering an improvement. The Challenger 601-3A was the only aircraft that experienced a price increase, versus the Ask Price decrease incurred by the other five models within the group.
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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Did you miss last month's analysis from Asset Insight? Find it here