Ownership 1.qxp_Finance 21/06/2022 16:33 Page 1
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Determine a Jet’s Value by its Maintenance Status
How does maintenance status impact the value of a business aircraft, and what actions can buyers and sellers take to better determine true value? David Wyndham provides an outline… reviously, we looked at the cyclical nature of aircraft maintenance expenses, concluding there’s a need for analysis of an aircraft’s maintenance condition, both in terms of current status and upcoming events, and its physical condition of the aircraft. These will help to establish what a fair value is. This time, we consider the area in more detail, highlighting actions an aircraft buyer or seller can take to better determine its value. There are three major variables when determining the value of an aircraft. Aircraft age and utilization are the two variables that, once they’ve occurred, cannot be undone. Aircraft value declines with both. The third variable is maintenance status. What maintenance has already been done, and what is yet to be done are within the control of the owner, and will also impact the aircraft’s value. Let’s look at an example. Assume an eight-year major airframe inspection has a total cost of $800k. ● Every year from new, the inspection gets closer, averaging $100k in maintenance expense accrued annually. This is your accumulated financial exposure for the future maintenance due. ● At age five, the financial exposure reaches $500k. You have $300k yet to accrue. This amount is your maintenance equity.
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Now let’s look at three sample aircraft, each with a different financial exposure with respect to this single $800k maintenance inspection. ● ● ●
Aircraft A: Age 7; $700k financial exposure Aircraft B: Age 8; $800k financial exposure (inspection due) Aircraft C: Age 8; $0 financial exposure (inspection accomplished)
As a buyer, which of these three would most interest you? Even though Aircraft A is the youngest, it has a financial exposure (accrued expense) of $700k. Having just completed the inspection, Aircraft C, although older than Aircraft A, now has zero financial exposure – or $800,000 in equity related to this inspection. If you repeat this process for each inspection, component overhaul, and part replacement, you can end up with a chart like Chart A (overleaf), which is based on hours flown. As depicted, a new aircraft has zero financial exposure since all maintenance events are ‘fresh’ with zero time accrued. As the aircraft flies, individual maintenance events accrue more financial exposure. Periodically (hours or months) some maintenance will be accomplished, reducing the financial exposure (or adding equity).
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