- 16 Sep 2021
- Tony Kioussis
- Market Insight
How is it possible to understand buyer and seller dynamics when it comes to valuing a business jet or turboprop on the pre-owned market? Asset Insight’s Tony Kioussis offers some guidance.Back to Articles
If you're seeking a deeper insight into the value of a private jet or turboprop on the pre-owned business airplane market, you'd do well to understand Asset Insight's ETP Ratio, how it's derived, and what it signifies. Tony Kioussis explains...
Imagine, for a moment, the following scenario where two business jets of the same make/model are listed for sale: The total time for one is 3,800 flight hours,while the second has accumulated 4,200 flight hours. Both are inviting prospective buyers to make an offer.
Now imagine that one prospective buyer offers $4m for the higher-time aircraft, while another prospect offers $2.8m for the lower-time aircraft. Both offers are accepted. How did these two buyers justify their offer price?
What the cursory information didn’t reveal is that the aircraft model in question has engine overhauls due at 4,000 flight hours, and the total cost to complete that event is estimated to be around $1m.
The prospect seeking the higher-time aircraft ‘knows’ the engine Maintenance Exposure for that asset, since the overhauls were completed during the past 200 flight hours. In contrast, the prospect seeking the lower-time aircraft cannot be certain what may be found when the engines are inducted for overhaul, so they build a ‘safety margin’ into their offer price.
Now let’s assume the two aircraft had 7,800 and 8,200 flight hours, respectively, and both invited prospective buyers to make an offer. One prospective buyer offers $2.6m for the higher-time aircraft, while the lower-time aircraft receives an offer for $2.1m.
This time, the seller of the higher-time asset accepts the buyer’s offer, but the lower-time aircraft seller does not. Why? The answer has more to do with buyer and seller dynamics than it does with either the asset’s Maintenance Exposure, or its price.
How to Calculate an Aircraft’s ETP Ratio (and its Impact on Marketability)
Maintenance Exposure is defined as the amount of maintenance cost accrued/embedded in an aircraft at any given point in time. If an aircraft is 75% of the way to a double-engine overhaul, and the overhauls are expected to cost $1m, then the Maintenance Exposure for the aircraft’s engines would equal $750,000.
By calculating the percentage of the cost accrued, based on each scheduled maintenance event’s completion requirement, one can compute the asset’s total Maintenance Exposure.
For any aircraft, Maintenance Exposure can accrue only so far before maintenance work must be completed.
As an aircraft ages, however, its value decreases. There will come a time when its Maintenance Exposure will equate to more than 40% of the seller’s perceived value (or Ask Price).
When a prospective buyer adjusts their offer to address the aircraft’s accrued maintenance (Maintenance Exposure), the offer figure is, all too often, unacceptable to the seller, and a deal is not reached.
Often in such cases, it is not until an aircraft undergoes some major maintenance work, that its seller is sufficiently motivated by a higher price offered by a buyer, and the aircraft is sold.
The Maintenance Exposure to Ask Price Ratio (ETP Ratio) may sound like theory, but its effect on an asset’s Days on the Market prior to a sale can be proven through historical data, making the ETP Ratio 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 by 30%, and, in many cases, by much more (see Table A, left).
Accordingly, the lower the ETP Ratio that an aircraft has, the more marketable the asset becomes.
While we have simplified the ETP Ratio calculation by only accounting for engine maintenance on the four aircraft cited in our two examples at the start of this article, their ETP Ratio would compute as shown on Table B, below (remember, the Engine has a 4,000 flight hours TBO).
How Do Engine Maintenance Programs Impact ETP Ratios?
One question that often comes up is the effect engine maintenance program coverage (referred to as Hourly Cost Maintenance Program, or HCMP coverage, within this article) has on the ETP Ratio.
HCMP coverage improves an aircraft’s ETP Ratio by reducing its Maintenance Exposure figure, commensurate with the level of HCMP coverage. For the examples in this article, where the only Maintenance Exposure item we assumed related to engine maintenance, each aircraft’s HCMP-Adjusted ETP Ratio would be equal to 0.0%.
However, it is important to remember that all upcoming maintenance event costs (e.g., airframe, APU, etc.) must be included in our calculation if we are to accurately assess an aircraft’s marketability through its ETP Ratio.
Based on the high cost of a major engine maintenance event, such as an overhaul, engine HCMP coverage can substantially reduce an aircraft’s Maintenance Exposure figure, often lowering the HCMP-adjusted ETP Ratio below the 40% figure that statistics reveal to be the point of dramatically increasing the number of days an aircraft spends on the market prior to a sale.
Table C depicts how Maintenance Exposure would be computed on a theoretical aircraft that has a small number of events under its Scheduled Maintenance Program.
Let us assume the aircraft was manufactured 120 months (ten years) ago and has accrued 2,510 Flight Hours and 2,510 Landings/Cycles, and its APU has amassed 715 Total Hours. Let’s also assume the aircraft has Engine and APU Hourly Cost Maintenance Program coverage; that it’s interior has never been refurbished; and that the aircraft has not been repainted since first entering service.
Interior Refurbishment and Exterior Paint are not (strictly speaking) part of an aircraft’s Scheduled Maintenance Program. However, accounting for their cost increases the ETP Ratio’s validity, since both are maintenance events requiring completion at some point.
As their aircraft ages, owners should find it useful to estimate when their asset’s ETP Ratio is likely to exceed the 40% mark. If it has already done so, it would be worth evaluating whether Hourly Cost Maintenance Program coverage would help lower the Maintenance Exposure sufficiently to bring the HCMP-adjusted ETP Ratio below 40% again.
Keep in mind that HCMP coverage has a cost, and does not provide a dollar-for-dollar benefit for older assets. The exact financial benefit is determined by market conditions and each specific make/model’s market appeal.
Nevertheless, it is safe to assume that if an aircraft’s age has lowered its industry value to $750,000, neither HCMP coverage, nor completion of a million-dollar engine maintenance event, is going to add one million dollars to the value of the asset. It is, however, likely to increase its appeal to buyers.
Statistics clearly demonstrate that the ETP Ratio can be a useful decision-making tool. If you are selling your aircraft, then knowing your aircraft’s current ETP Ratio may help explain the purchase offers you are receiving, thereby helping you decide whether to accept an offer, or continue to assume the asset’s ongoing cost of ownership.
Estimating your aircraft’s future ETP Ratio, based on anticipated utilization, accurate maintenance costs, and realistic residual value figures, can help you determine the ideal aircraft replacement period, allowing you to optimize your investment in an asset that will definitely depreciate as time marches on.
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