Aircraft Valuations: What’s the Secret Sauce? / By Marc Cho
During an interview for a summer internship before my senior year at college, an investment banker asked me to sum up investment banking in one word. As a naive and uninformed undergrad, I didn’t have a good answer so I replied, “finance.” He told me the better answer was, “value”. He said the goal of any investment banker was to determine value – of a company, an asset, a contract, and anything else that can be financed. I don’t know if my answer was the deciding factor, but I didn’t get that Wall Street internship.
Now with a little more experience under my belt, I agree that determining value is the cornerstone of all finance activities, especially aviation finance. The most significant variable in nearly all aircraft leasing and finance transactions is determining the value of the asset – in most cases- an aircraft or an engine. The need for credible asset value assessment spawned an entire segment of the industry comprised of appraisal and valuation firms. While there is a governing body for aviation asset appraisers called ISTAT, each firm has its own approach and views on methodology and the sector provides an essential service to the aviation finance community. The challenge has been to ascribe value to an asset that is influenced by so many variables, many of which are ignored for the purposes of determining “market” value under theoretical market conditions, which may or may not be applicable.
While this may seem counterintuitive, the challenge to determining an aircraft’s value is more difficult with younger aircraft. At GA Telesis we take a practical approach noting that with a new aircraft, its value is much more than the sum of its parts. If a new aircraft were disassembled for parts it would only be worth a fraction of its delivered price. The majority of its value is based on the revenue generating capability of that aircraft for an airline and what an airline is willing to pay for that capability in purchase price or lease rent. As an aircraft ages and its remaining useful life decreases, the value of that aircraft migrates closer to the sum of its parts, since its remaining revenue service life has shortened.
Thus, valuing a mid-life or end-of-life aircraft is more tangible, but this leads to a different challenge: values for used serviceable material (used airframe and engine parts) are not published, but determined by supply and demand. Further, price visibility is really only available to those who participate in that trading market. Academics may try to triangulate or procure trading values for used aircraft parts, but that source data is often limited or outdated.
Having actual trading data and price discovery on used serviceable material is a major information advantage that we at GA Telesis are fortunate to have available at our fingertips and is a key component of our granular, piece-part value assessment for any aircraft or engine investment. Investors without access to that data are applying their best estimates, based on generally available information, such as appraisals, but in what has become a highly competitive market, better data will often differentiate the winners and losers.
By the way, I don’t regret not getting the Wall Street internship. I took a summer internship with Heller Financial in their Aircraft Finance Division. Without that almost random course change in my career trajectory, I would not have been exposed to aircraft finance, which was the launching point of what has now been nearly 22 years in this amazing industry where I now lead the aviation lease/finance unit at GA Telesis.