How Does Maintenance Status Impact Value? Part II

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…

Previously, 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.

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). 

“Periodically (hours or months) some maintenance will be accomplished, reducing the financial exposure (or adding equity).”

After the aircraft enters service, the financial exposure is never at zero since the aircraft is always accumulating time towards one future maintenance event or another.

What Can Sellers do to Reduce the Exposure?

First, the seller needs to work with an experienced broker to look at the current marketplace. Where is the Seller’s aircraft positioned in relation to the other competitive aircraft available for sale?

If the Seller’s aircraft is well positioned, relative to similar aircraft (i.e., in terms of age, airframe/engine hours, and maintenance financial exposure), then the ask price can reflect this desirability.

However, if the Seller’s aircraft is not in a strong position relative to the other aircraft for sale, the Seller and broker will need to discuss either a price relative to its position, or undertaking some of the future maintenance ahead of schedule, which will better position it among the competition.

Alternatively, the Seller could place the aircraft on a guaranteed hourly maintenance program (GHMP). Depending on the model and category, an engine GHMP is almost a requirement. Engine or airframe GHMP can be very desirable for buyers as they cover the financial exposure for the covered maintenance to the extent of the accrued coverage.

Enrolling a used aircraft on a GHMP can be costly, since you are essentially ‘buying in’ the hours already accrued towards the next event. Therefore, this may be an option that needs careful discussion with your broker. What Should the Buyer Do Regarding Maintenance Exposure?

The buyer needs to educate themselves about the risks and rewards of each aircraft they’re considering for purchase. How does one aircraft compare with the available options in the market – including when compared to the cost of acquiring a new aircraft with zero time, zero age, and almost zero flight hours?

● What is the maintenance status of each aircraft available for sale? ● What is their financial exposure?

Remember, if you acquire an aircraft with substantial maintenance coming due, you accept the financial exposure of that maintenance, not to mention the downtime while the maintenance is accomplished.

A GHMP may be desirable, and that program shares the risk of the maintenance costs.

Regardless of whether the aircraft is on a GHMP or not, a pre-buy inspection is always recommended to verify the condition and status of the aircraft you’re in the process of acquiring. An acceptance flight is also a good idea as it gives the buyer the chance to confirm the working order of everything from the lavatory to the landing gear.

Lastly, note that while this article deals with the maintenance condition, there are other considerations – such as level of equipage, cosmetic condition, quality of the maintenance records, and more, that should be part of the decision of whether to buy or not. ❚

DAVID WYNDHAM

is the Founder of David Wyndham + Associates, LLC. He is a highly respected industry veteran having built up more than 36 years of aviation experience, including as president and co-founder of Conklin & de Decker. He is also Vice President, Asset Insight Consulting Services. https://www.linkedin.com/in/davidwyndham/

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Deciding to purchase a plane is ill-advised without a clear understanding of a loan’s term versus its amortization.

Adam Meredith

Amortization is the length of time it takes a borrower to repay a loan. Term is the period of time in which it’s possible to repay the loan making regular payments. Term, therefore, is a portion of the loan amortization period. Consider it the length of time in which one is committing to doing business with the lender. Most people are used to or conceptualize that a loan’s term and its amortization are coterminous—that when the term is done, the amortization is also done. That’s not always the case. More importantly, that’s not always in your best financial interest. Frequently, banks offer loans where the term is shorter than amortization. When the two are not coterminous, the loan is said to have a balloon—common parlance for the remaining principal owed at the end of the term. At the end of the term, the borrower has three choices-refinance with the existing lender, finance externally with a different lender, or pay it off. Most people choose options #1 or #2 to avoid the balloon. Option #3—paying it off—can present two ways. The first is when the borrower pays off the debt; the second is when the borrower sells the plane. Part of your decision must include a thorough understanding of how long you intend to keep the loan--not how long you’re going to keep the plane. If you’re uncertain about how long you plan to keep the loan, we might advise seeking a shorterterm loan at first. In a shorter-term loan, the cost of money is cheaper than it is in the long term. For instance, ten-year money costs more than five-year money. One note: The more technically advanced the aircraft typically the shorter the amortization. Also, lenders tend to favor shorter-term loans, particularly on bigger-dollar deals. That’s because banks know a lot can change in five years. They ’d rather look at a loan every five years to reassess the risks. Additionally, revisiting a loan every five years provides a bank an opportunity to look at the borrower’s financials. Are things going better? Worse? The same? At AOPAAAF, we’ll also discuss with you the efficacy of floating vs. fixed interest rates. In this current environment, for instance, where interest rates will remain flat for some time or may potentially go down, a floating rate can often be a better option. In all cases, by trying to get a longer term and/or a longer fixed interest rate period—either/or—it’s going to cost you more in interest over the long term. But it will also cost you more money when the amortization is longer because you have principal outstanding for a longer period. Bottom line: The more quickly you pay down the principal, the less you pay in interest.

Great advice. Great rates. All from helpful and responsive reps you can trust! Three good reasons to turn to AOPA Aviation Finance when you are buying an airplane. If you need a dependable source of financing with people who are on your side, just call