‘Aircraft Economic Life’ is a hot topic right now. With many different views being put forward about the longevity of aircraft, especially from a financing perspective, appraisers are under increasing pressure from some sectors of the industry to reduce their current predictions. But independent aviation consultancy, IBA Group, do not believe this is the right course of action to take.

Several factors have come into play with regards to Aircraft Economic Life recently:

1. The global financial crisis and recessionary pressure has reduced the short term demand and growth in many regions. Including those which were previously predicted to continue to grow at very high rates, such as the BRIC regions.
2. Production rates for new aircraft have generally increased.
3. The Basel 3 process has created more robust stress testing of the asset performance and loss given default scenarios.
4. There is an increasing trend towards operating leases that allow the lessees to return aircraft long before their Economic Life expires.
5. More aircraft are being parted out for spares at a young age – a few as early as two years old and more in the five-ten year age range have been seen recently.

“IBA’s JetValues2© online system uses a complex set of data points to calculate each aircraft valuation” explains Dr Stuart Hatcher, Head of Valuations and Risk at IBA. “The modelling of the Economic Life of an aircraft considers several factors, one being when the aircraft was built in terms of the production cycle for that aircraft type. For example, an Airbus A320 or Boeing 737-800 built in the early stages of that aircraft model’s introduction may remain in service for close to 30 years, whereas a younger aircraft built towards the end of the production cycle may remain in service closer to 20 years.”

“On average IBA maintain that their 25 year Economic Life prediction remains valid and we have no intention of altering that assumption at this time. Although, it is important to add that whilst Economic Useful Life may not change, the shape of the depreciation curve itself may change over time” says Dr Hatcher.

There have been several recent reports on this subject, Phil Seymour, IBA President and COO, comments “These analyses are not necessarily valid in order to determine what the future may hold. The aircraft acquisition world has changed and will change more rapidly in the next five years with the increasing move towards operating leases. It is no secret that this is the trend, but in practice it is creating more frequent opportunities for airlines and lessors, and/or financiers, to assess the economics of each aircraft on an individual basis.”

For example, an Airbus A320 or Boeing 737-800 placed on a six year lease term provides the operating airline with the opportunity to assess the viability and economics of that specific aircraft, and current suitability to its fleet/operation needs, at Year 6. At which time, the airline may decide that in its view, it would be economically prudent to return the aircraft to the lessor. The lessor will then analyse the economics of that aircraft from its own perspective. How much debt and equity remain in the asset? Are maintenance reserves in place that could be provided to the next lessee? Or could that cash be taken as profit if the aircraft is scrapped or placed on a lease where the next lessee is given no access to those cash reserves?

Seymour concludes, “The ‘cycle’ plays a huge part in the decision process. If an aircraft has been financed at high levels it may not be possible, without huge write downs, to simply scrap the aircraft. However, the market may be such that holding onto the asset in a downturn, without it earning revenue, just compounds the problem. Ultimately, we expect the market to correct itself, but it may not be in the next six months – it may take two-three years.”

To continue the discussion on Aircraft Economic Life, join Phil Seymour in Dublin next week where he will be taking part in the following events and delving deeper into this subject:

Euromoney: 15th Annual Global Airfinance Conference Dublin
· 22nd January – 9am: Are manufacturers sufficiently adapting delivery rates to current market conditions?
· Do we need to see a drop in production rates to avoid residual value meltdown?
· Is demand being artificially maintained by the availability of ECA backed funds?
· Is the secondary market being damaged by the ability of poorer airline credits to acquire new aircraft?
· Are base values declining permanently?

Airline Economics: Growth Frontiers Dublin 2013
· 22nd January – 16:15: Aircraft Valuations Panel – What is the useful economic life of an aircraft?
· Aircraft valuations – do the panel members agree with one another on certain types? Banks, lessors and owners all have varying views on what their asset is worth – So how can/should the valuation firms react? As private investors move into aviation assets, accurate valuations become more important than ever. What of those new generation aircraft? Will they have an adverse impact on current airline and lessor fleets in the coming years and what is the outlook for future values?

Euromoney: 15th Annual Global Airfinance Conference Dublin

· 23rd January – 16:55: Production Rates and Residual Values’ Debate – Eating tomorrow’s lunch?
· Market practitioners from the leasing and OEM communities will react to certified appraiser Phil Seymour’s analysis on production rates, residual values and the attractiveness of the leasing market.