Values and Valuers

An Assessment of the Aircraft Valuation Business

Dick Forsberg
18 February, 2016

Dick Forsberg
Head of Strategy, Avolon
Dick Forsberg has over 44 years' aviation industry experience, working
in a variety of roles with airlines, operating lessors, arrangers and capital
providers in the disciplines of business strategy, industry analysis and
forecasting, asset valuation, portfolio risk management and airline credit
assessment. As a founding executive and Head of Strategy at Avolon,
his responsibilities include defining the trading cycle of the business,
primary interface with the aircraft appraisal and valuation community,
industry analysis and forecasting, driving thought leadership initiatives,
setting portfolio risk management criteria and determining capital
allocation targets. Prior to Avolon, Dick was a founding executive at RBS
(now SMBC) Aviation Capital and previously worked with IAMG, GECAS
and GPA following a 20-year career in the UK airline industry. Dick has
a Diploma in Business Studies and in Marketing from the UK Institute
of Marketing is a member of the Royal Aeronautical Society and also a
Board Director of ISTAT (The International Society of Transport Aircraft
Trading).

Acknowledgement
The Author wishes to acknowledge the work undertaken by the ISTAT Appraisers Group
and their comprehensive Appraisers Handbook, from which the value definitions used in
this paper have been taken.

Disclaimer
This document and any other materials contained in or accompanying this document
(collectively, the Materials) are provided for general information purposes only. The
Materials are provided without any guarantee, condition, representation or warranty
(express or implied) as to their adequacy, correctness or completeness. Any opinions,
estimates, commentary or conclusions contained in the Materials represent the
judgement of Avolon as at the date of the Materials and are subject to change without
notice. The Materials are not intended to amount to advice on which any reliance should
be placed and Avolon disclaims all liability and responsibility arising from any reliance
placed on the Materials.

Funding the Future

An Assessment of the Aircraft Valuation Business

Contents
Introduction

Key Messages

Choosing an Appraiser

Whats in a Value?

The Pros and Cons of Automation

Value the Money, Not Just the Metal

Variation and Volatility

The Influence of Appraisers

A Call to Arms

10
11

Values and Valuers

An Assessment of the Aircraft Valuation Business

Introduction
This discussion paper examines the business of aircraft appraisals
and valuations, both from the perspective of an end user and with a
strategic eye on the broader industrys future needs.
A wide range of values and value-related
products is available to the industry, offered
by an equally wide range of appraisal firms.
Consequently, it can be difficult to differentiate
between them and this paper offers some
guidelines on what to look for when making
that key appraiser selection.
How much does the typical customer know
and understand about the values they have
requested or about the appraisers they
have commissioned? What are they getting
from the appraisers and, equally important,
what are they not getting or are potentially
misunderstanding?
This paper provides a brief overview of the
main types of valuations that are available and
when they should be used, takes a critical look
at automation and suggests that customers
may be missing out through an over-reliance on
instant results.
Today, most commercial aircraft are traded
with lease and financing structures attached,
yet buyers and sellers still too frequently rely
on an incomplete valuation of the transaction,
although appropriate appraisal products exist
to provide the full picture. The paper explores
the concept and benefits of Lease-encumbered
Values.

The commercial aviation industry

has grown significantly over the

past 15 years, not only doubling
in size but also expanding the
range and volume of asset-related
transactions

The paper considers why appraisers value

opinions may vary and how a greater
appreciation of asset value volatility can assist
investors to frame transactions in the context
of likely value outcomes.
The commercial aviation industry has grown
significantly over the past 15 years, not only
doubling in size but also expanding the range
and volume of asset-related transactions and
the numbers of financiers and investors that
are participating. The paper asks whether, as
the demands of the industry become more
exacting, appraisal services are keeping pace.
What more should be done to ensure that
future industry funding requirements can be
met by attracting new types of investor that
require levels of asset valuation rigour and
transparency hitherto unseen in the sector?
The appraiser community today wields
significant influence across the industry, where
only a 1% reduction in appraised values would
wipe over $2.5bn off the in service leased fleet.
The challenge to the appraiser community is
to rise to the responsibilities that go with that
influence and to evolve into a consistently
insightful, rigorous, transparent and reliable
source of information supporting the 3500-plus
aircraft deliveries and secondary trades that
now take place each year.

Funding the Future

An Assessment of the Aircraft Valuation Business

Key Messages
The ISTAT Appraisers Program has been
setting standards and supporting the
appraiser industry for over 25 years. Its Code
of Conduct is observed throughout the
appraiser community and adherence should
be a prerequisite of any appraiser selection
Automated on-line valuation products
provide a cost-effective and speedy service
for a range of applications, but their generic
nature can mask significant value variances
by excluding critical data
A basic Desktop Appraisal will often provide
a more detailed and accurate valuation
than an on-line service and provides an
opportunity for dialogue between appraiser
and client which helps ensure that the
resulting analysis is fit for purpose
Although most aircraft are now traded with
a lease attached, the standard appraisals
that are typically used to benchmark asset
value exclude the incremental financial
benefits accruing from the associated lease
Lease-encumbered valuations, which take
account of the cash flows and income
streams in assessing the all-in value of the
aircraft and lease package, should be used
as the basis for pricing such transactions
The incremental lease-encumbered value in
a lessor portfolio is a direct measure of the
value added by the platform, its systems,
processes and human capital
Appraisers come in all shapes and sizes and
selecting the right one for the job requires
careful assessment
In order to merit serious consideration as
values providers, appraisers must conform
to the ISTAT definitions and code of conduct
for all of the relevant constituents of the
range of appraisals and valuation services
that they provide.
The appraiser community, which has a
significant and disproportionate influence
on the industry, has remained relatively
static compared to the changes seen in the
commercial aviation sector over the past 15
years, in terms of size, product offering and
competency.

Changes are now required, not only to keep

pace with current levels of market activity,
but also to meet the standards of rigour,
consistency and transparency that will be
demanded by new investors seeking to enter
the sector as aircraft complete the transition
from alternative to mainstream investment
class.
A Call to Arms for appraisers highlights the
key areas of focus:

Appraisers should be able to demonstrate

their track record of forecasting accuracy
in a verifiable way using approved
techniques that withstand scrutiny
from experienced capital markets fund
managers and investors.

Appraisers must become more diligent in

ensuring that changes made to current
value opinions are reflective of the
vintage of the asset and do not rely on
the extrapolation of trading data from
one age bracket to another

Some valuation methodologies have not

changed in 20-30 years. Appraisers must
ensure that their skills and IP are at the
cutting edge to meet the standards of
rigour and governance that a $100bn+
per annum industry demands

Appraisers should publish their

methodologies, core assumptions,
sample size and volatility data

Appraisers must be Thought Leaders,

prepared to raise and discuss challenging
issues and to share best practices within
the appraiser community.

More industry professionals are needed

to step up to the challenge of securing
ISTAT accreditation, which would be
facilitated by streamlining the ISTAT
certification process without diluting
the standards

Appraisers and their customers must

work more closely with one another,
developing greater mutual understanding
through increased openness, dialogue
and transparency.

Values and Valuers

An Assessment of the Aircraft Valuation Business

Choosing an Appraiser
More than a dozen aircraft appraisal companies
offer a range of valuation, technical and
associated advisory and support services to
the commercial aviation industry. Whilst the
output of their appraisal work is ostensibly
homogenous an opinion of the value of
an aircraft at a point in time - the processes
whereby they reach their opinions can be very
different.
When selecting an appraiser, therefore, as with
any product or service, clients are well advised
to think carefully about their requirements
and who is best placed and resourced to meet
those needs.
Price should not be the prime determinant in
selecting an appraiser, but, as with most things,
you will usually get what you pay for. In the
selection process it is important to consider:
the need and ability to build a long-term
relationship and to be able to engage in
dialogue
the need and ability to develop a
good understanding of the valuation
methodologies and philosophy applied by
the appraiser
whether the appraiser has key essential
qualities such as access to a meaningful
spectrum of value data, intellectual
capital, modelling capability and analytical
manpower

clients are well advised to think

carefully about their requirements

and who is best placed and
resourced to meet those needs.

the quality of analysis, insightfulness and

depth of intimacy with the market
the historical accuracy of the values
produced and an ability to measure
performance
the range and scope of their valuation and
other supporting products
the frequency of value updates and revisions
at least quarterly to minimise step changes
and year-end distortions
where they sit in the range of values
available across the spectrum of appraisers
(more on this in section 7)
whether they are widely used by banks,
lessors, investors and stakeholders or is their
business primarily focussed on one niche.

Funding the Future

An Assessment of the Aircraft Valuation Business

Whats in a Value?
Aircraft values come in a number of different
forms, each of which can be provided at
varying levels of detail, depending on what they
are to be used for. Most appraisers adhere to
standards, guidelines and definitions that have
been developed and set out by ISTAT, through
its Appraisers Program, which will be 27 years
old in March 2016. The definitions are published
in ISTAT's Appraisers Program Handbook, the
most recent revision of which was published
in January 2013. These definitions, along with
a detailed Code of Conduct which includes
important ethical considerations, should be
central to every appraisers business activities
and strictly adhered to.
It is worth summarising the main value
definitions from the Handbook, as these cover
most of the day to day value requirements of
our industry.
Firstly, Base Value, which is the Appraiser's
opinion of the underlying economic value of
an aircraft in an open, unrestricted, stable
market environment with a reasonable balance
of supply and demand, and assumes full
consideration of its highest and best use.
An aircrafts Base Value is founded in the
historical trend of values and in the projection
of value trends and presumes an arms-length,
cash transaction between willing, able and
knowledgeable parties, acting prudently, with
an absence of duress and with a reasonable
period of time available for marketing. In most
cases, the Base Value of an aircraft assumes
its physical condition is average for an aircraft
of its type and age, and its maintenance time
status is at mid-life, mid-time (or benefiting
from an above-average maintenance status if it
is new or nearly new, as the case may be).
Market Value (or Current Market Value if the
value pertains to the time of the analysis)
is the Appraiser's opinion of the most likely
trading price that may be generated for an
aircraft under the market circumstances that
are perceived to exist at the time in question.
Market Value assumes that the aircraft is valued
for its highest, best use, that the parties to the
hypothetical sale transaction are willing, able,
prudent and knowledgeable, and under no
unusual pressure for a prompt sale, and that
the transaction would be negotiated in an open
and unrestricted market on an arms-length

basis, for cash or equivalent consideration, and

given an adequate amount of time for effective
exposure to prospective buyers.
Fair Market Value is synonymous with Market
Value, because the criteria typically used in
those documents that use the term Fair
reflect the same criteria set forth in the
above definition of Market Value. By itself,
the term Fair does not bring any additional
qualifications to the appraised value, but it is a
term sometimes used in leases, sales contracts,
tax regulations and legal documents, and
is sometimes accompanied with a specific
definition to which the contracting parties have
agreed. In such cases an Appraiser may be
required to determine their value according to
that particular definition.
Distress Value, Forced Sale Value, Liquidation
Value are terms to describe the Appraiser's
opinion of the price at which an aircraft (or
other assets such as an engine or spare parts)
could be sold in a cash transaction under
abnormal conditions typically an artificially
limited marketing time period, the perception
of the seller being under duress to sell, an
auction, a liquidation, commercial restrictions,
legal complications, or other such factors that
materially reduce the bargaining leverage of the
seller and give prospective buyers a significant
advantage that can translate into heavily
discounted actual trading prices. Depending
on the nature of the assignment, the appraiser
may be asked to qualify his opinion in terms
of disposition within a specified time period,
for example 60 days, 90 days or six months as
the needs may be. Apart from the fact that the
seller is uncommonly motivated, the parties to
the transaction are otherwise assumed to be
willing, able, prudent and knowledgeable, and
negotiating at arm's-length, normally under the
market conditions that are perceived to exist at
the time, not an idealized balanced market.
Lastly, Securitized Value or LeaseEncumbered Value is the Appraisers opinion
of the value of an aircraft under lease, given
a specified lease payment stream (rents and
term), an estimated future residual value at
lease termination and an appropriate discount
rate.

Each of the value definitions can be provided

at varying levels of detail, depending on the
circumstances and purpose of the valuation.
Again, ISTAT provides some definitions as to what
to expect at each level:

DESKTOP APPRAISAL - does not include
any inspection of the aircraft or review of its
maintenance records. It is based upon assumed
aircraft condition and maintenance status
or information provided to the appraiser or
from the appraiser's own database. A desktop
appraisal would normally provide a value for a
mid-time, mid-life aircraft.

EXTENDED DESKTOP APPRAISAL - is still
characterized by the absence of any on-site
inspection of the aircraft or its maintenance
records, but does include consideration
of maintenance status information that is
provided to the appraiser from the client,
aircraft operator, or in the case of a second
opinion, possibly from another appraiser's
report. An extended desktop appraisal
would normally provide a value that includes
adjustments from the mid-time, mid-life
baseline to account for the actual maintenance
status of the aircraft.

FULL APPRAISAL - includes an inspection
of the aircraft and its maintenance records.
This inspection is aimed solely at determining
the overall condition of the aircraft and
records to support the value opinions of the
appraiser, and would not, for example, include
opening of inspection panels on the aircraft
or a detailed review of record archives. A
full appraisal would normally provide a value
that includes adjustments from the mid-time,
mid-life baseline to account for the actual
maintenance status of the aircraft, and possibly
other adjustments to reflect the findings of the
inspection of the aircraft and its records.

COMPREHENSIVE APPRAISAL - includes a
detailed inspection of the aircraft and records.
Sufficient detail is required, for example, to
insure that the records are in sufficiently good
order to allow for the re-registration of the
aircraft in a different country.

FINANCIAL APPRAISAL - determines the
value of an aircraft to an investor based upon
the income earning potential from its lease
and residual value. A financial appraisal may be
done in conjunction with either desktop or full
appraisals.

Values and Valuers

An Assessment of the Aircraft Valuation Business

Since the appraisal methodologies work at

different levels of detail and granularity, each
is better suited to some types of transactions
or requirements than others. The majority of
customers will find that their needs can be met
either by a Desktop Valuation or an Opinion
Letter. The former contains a limited element of
narrative commentary to support values which
are adjusted to reflect maintenance condition,
utilisation and as much, or little, of the actual
aircraft specification as the customer is able to
provide. An Opinion Letter is an even briefer
document which is simply a statement of the
appraised value, but will often suffice for routine
requirements.
The additional technical and maintenance detail
provided in an Extended Desktop or Full onsite Inspection can be particularly helpful where
older aircraft are involved or where repossession
is on the cards. A full blown, tyre kicking, rivet
counting, record checking Comprehensive
Appraisal provides the ultimate, gold-plated
valuation service, where the value reflects the
realistic achievable sale price for the aircraft or
its components "as is, where is". Whatever the
purpose and detail of the valuation, it is important
to keep in mind the definitions of base or
market, full life or half life value.
In the days before on-line systems became
ubiquitous, it is fair to say that the basic level
of understanding from the users perspective
was generally quite high. The only way to obtain
an aircraft valuation was by requesting one of
the manual methodologies from an appraiser.
Having made the request, a dialogue between
appraiser and client ensured that the valuation
selected was appropriate for its purpose and
that all relevant information about the asset in
question had been provided. These checks and
balances served the industry well and the majority
of values provided were fit for purpose and used
accordingly. This remains the case today where
manual appraisals are requested, but automation
is putting distance between the appraisers
and their clients, increasing the potential for
misunderstanding.

Funding the Future

An Assessment of the Aircraft Valuation Business

The Pros and Cons of Automation

If you are involved in leasing, financing, trading
or otherwise making investment decisions
involving commercial aircraft, there is a high
probability that you will have requested and
downloaded values from one or more of the
automated on-line valuation services offered
by several of the industrys leading appraisal
companies. First introduced 17 years ago, in
1999, these products are now estimated to
account for over 50% of valuation requests
for some of the appraisers that provide them
and, for many users of aircraft values, be they
buyers, sellers, lenders, lessors, manufacturers,
bankers, financial advisors or analysts, these
on-line tools have become their principal, or
in some cases their only, source of aircraft
values, replacing Desktop Valuations in many
instances.
Yet how many consumers of value data truly
understand what they are getting from these
products? And, equally importantly, what they
are not getting.
In todays automated, instant world, it often
seems that the internet can immediately
provide the answer to every question and that
high-tech solutions to every-day tasks produce
results that are as good, if not better, than
the steam-driven technology they replace. In
this context, however, it is important to bear
in mind that even the least granular level of
manual value analysis, the Desktop Appraisal, is
likely to take account of more information and
provide a more accurate valuation than an on
line request. Why? Because an on line product,
in order to run efficiently in real time and be
intuitively user friendly, will of necessity apply
a more generic, simplified approach to the

analysis. Minority variants of specific aircraft

types may be omitted from the selection menu;
only the highest value specification options
may be shown perhaps no more than basic
weight and thrust; a generic specification
taken from a commercial fleet database
may not reflect the specific msn requested;
broad-brush adjustments from half life to zero
time maintenance condition may throw up
anomalies.
In other words, whilst the on-line valuations will
provide a rapid (and low cost!) set of values,
they may ignore key elements of the aircraft
which, taken together, produce a significant
upward or downward impact on the total.
Whilst the scope of such variances will typically
increase with aircraft age, very young aircraft
are not immune. In most cases, a bespoke
desktop appraisal will quickly produce a more
accurate result.
However, on-line valuations are well-suited to
the routine tracking of aircraft or portfolio value
movements, for obtaining ball-park order of
magnitude values, for comparing the relative
virtues of different aircraft, for benchmarking
the performance of a loan against key
covenants and for a range of general audit
and analysis tasks. They are normally accurate
within the limitations of their generic nature
and there is no waiting period.

these products are now estimated

to account for over 50% of

valuation requests for some of the
appraisers that provide them

Values and Valuers

An Assessment of the Aircraft Valuation Business

Value the Money, Not Just the Metal

One fundamental aspect of Base Values and
Market Values, whether obtained on-line or
through desktops or more detailed manual
appraisals, is that they provide valuations of
the aircraft as a stand-alone asset. Although
the leasability of the aircraft type may be one
of the factors taken into consideration when
reaching a value determination (since leasing
would come under the definition of highest
and best use), standard appraisals do not take
into consideration any value enhancement,
or decrement, deriving from an associated
lease structure which generates cash flows
and an income stream for the aircraft owner.
In an industry where arguably more than 90%
of aircraft are now traded (other than for
part-out) with a lease attached, it is perhaps
surprising to some that the baseline appraisal
definition continues to be for a single aircraft
transaction with no lease attached, taking
no benefit from the assets capabilities as
a revenue generator. Some appraisal users,
indeed, may be unaware of this important
distinction.
The tendency of stakeholders in the industry to
default to base and market value appraisals is
at odds with other asset investment classes. In
the commercial real estate market, for instance,
there is a range of recognised definitions for
valuations that reflect the income-generating
status of the property, working upwards
(in value terms) from Site Value, through
Rebuild Cost, Vacant Use and Alternative Use
to Subject to Tenant. In aviation parlance,
this range of values may be considered to
span Scrap Value, Full/Half Life and Lease
Encumbered Value.

The tendency of stakeholders in

the industry to default to base
and market value appraisals
is at odds with other asset
investment classes.

In order to assess the true value of the aircraft

plus the associated financing and leasing
structures (the tenant), therefore, it would
be appropriate to undertake the more rigorous
and bespoke Lease-Encumbered Valuation,
also known as a Securitized Valuation or a
Financial Valuation. Although there is no single
defined approach for this analysis amongst
the appraiser community, the most commonly
used methodology takes account of the
present value of the net cash flows over the
lease term, including any maintenance return
condition adjustments and other risk mitigants,
discounted at an appropriate rate for the credit
quality of the lessee, plus the future value of
the asset at lease maturity, also discounted but
using a level slightly above the risk-free rate
(typically US Treasuries) associated with the
lease term.
These valuations come with a health warning
however. The ISTAT Appraisers Handbook
notes that the Appraiser may not be fully
aware of the credit risks associated with the
parties involved, nor all related factors such
as the time-value of money to those parties.
In other words, appraisers may understand
aircraft, but they are not usually expert credit
analysts. Any additional information and
guidance that the client can provide to assist
the appraisers choice of credit-related discount
rate is therefore likely to produce a more
nuanced and appropriate output.
A diligently undertaken LEV analysis will
often, though not always, result in incremental
value over and above the ISTAT-defined base
or market value of the stand-alone asset. In
certain circumstances, lease encumbrance can
have a downward impact on the value where,
for example, the lease has been contracted
during a period of market softness, perhaps
with a weak airline credit and at a depressed
lease rate. Nevertheless, using this approach
to establish the all-in value of the aircraft and
associated lease package as it would accrue
to the aircraft owner should be considered as
the basis for negotiating the majority of leaseencumbered aircraft or portfolio trades.

Funding the Future

An Assessment of the Aircraft Valuation Business

Variation and Volatility

The range of values provided by appraisers for
the same asset over the same timeframe can
be surprisingly large, even for widely traded
commodity aircraft. The examples below illustrate
the differences that occur at all points on the
age curve, even for two of the most popular and
frequently traded aircraft, highlighting one of the
key challenges for users of appraisers values
figuring out who is right.

A320 FL BV

US$M
60
50

13%

40

30

20

58%

10
0

Generic values from 9 leading appraisal firms

B737-800 FL BV

US$M
60
50

13%

40
30

20

58%

10
0

Generic values from 9 leading appraisal firms

Notwithstanding the comprehensive range of ISTAT

guidelines and definitions available to appraisers,
any appraisal or valuation is not a fact so much as
an opinion. An opinion reached following a process
of analysis, evaluation and interpretation, but at
the end of the day an expert opinion based on
a specific set of information and assumptions at
a particular point in time. Most appraisers would
agree that their methodologies involve a blend of
art and science and it is left to the individual client
to judge the validity of the dominant influence for
their chosen method and source of opinion.
Even within the scope of the science there are
a number of factors that contribute to differing
opinions. Unlike many other asset classes, the
overall number of commercial aircraft transactions
taking place is small by statistical standards,
whilst our industrys historical reluctance to share
trading data further restricts visibility. It is therefore
unrealistic to rely solely on quantitative methods to
determine value outcomes. The process is further
complicated when future values are required, as
individual appraisers views on factors such as
world and regional GDP growth, inflation and oil

prices will have a significant bearing on how aircraft

values may evolve, not to mention their sentiment
on economic lives, last off the line effects, future
new technology, valuing and depreciating high cost
BFE items, etc.
Access to different sub-sets of historical trading
data on which to base opinions on value behaviour
will also vary between appraisers, depending on the
extent of their direct involvement in deal-related
activity, how global their business activities are
and the level of intimacy they enjoy with industry
stakeholders. This creates a further potential source
of opinion divergence, as regional markets, investor
categories, etc., may not all be moving at the same
pace.
Limited access to trading data, often compounded
by the relatively small number of trades that take
place even in the current marketplace, frequently
lead appraisers to apply extrapolation techniques
to expand the range of aircraft vintages and models
that they can opine on. Whilst it can be reasonable
to make an assumption that the market values of
two very similar models, a 737-300 and a 737-400,
for example, are likely to move broadly in step, it is
not reasonable to presume that the market value
of, say, a two year old A320 will move in line with
that of a 10 year old example. Different aircraft
vintage ranges typically attract different types
of buyer, with different financial hurdles, costs of
capital and acquisition strategies. The youngest
assets are frequently sought by growth investors
seeking good quality investments that quickly
extend their portfolios scale and footprint, whereas
more opportunistic traders prefer older assets with
a higher element of distress or risk. Their pricing
characteristics will reflect these differences.
It is generally understood that liquidity, volatility
and value retention are all closely related. Although
not widely offered by the appraisers, one powerful
tool for reducing the uncertainty that goes with
spot forecasts and residual value curves is to
apply statistical analysis and modelling to measure
value volatility, particularly on the downside of
transactions, and to incorporate this volatility into
future value projections in the form of ranges or
outcome probability distributions. This allows end
users to frame their analysis in the context of a
likely range of outcomes, within which their desired
economic returns would need to lie. Providing
this additional risk metric to transactions would
materially reduce the likelihood of disappointment
at some point in the future life of the asset as well
as enabling a more sophisticated approach to
portfolio risk management.

10

Values and Valuers

An Assessment of the Aircraft Valuation Business

The Influence of Appraisers

A good deal has changed since the first
automated values went on line in 1999. At that
time, 13,000 commercial jets were in service,
of which 20% were leased. Todays fleet is 85%
larger, with 40% under lease management.
1100 aircraft were delivered in 1999, with a
$40bn price tag, of which lessors financed
25%. Last year lessors financed almost 40%
of 1500 aircraft deliveries valued at well over
$100 billion and the in-service leased fleet is
now valued at more than $260 billion. The
last 17 years has seen at least a dozen new
western leasing companies enter the market
alongside the more recent influx of Chinese
and Japanese lessors. Ten of todays Top 20
operating lessors were not around 17 years ago.
Some of the worlds largest financial institutions
now own operating lessors. Capital markets
products, including EETCs and both secured
and unsecured bonds, have taken off, providing
more than $20bn of liquidity over the past
two years, and private equity investors have
become significant participants in the industry.
Yet the appraiser world has remained relatively
static, with just a handful of new entrants over
the years. Moreover, the number of formally
qualified appraisers (accredited by ISTAT) has
not kept pace with the growth in commercial
aircraft fleets and financing activity. In 1999,
35 professionals held an ISTAT appraiser
certification. Today that number has risen to
53, a 50% increase over a period when the
world fleet almost doubled and the demand for
appraisals has grown even faster. Remarkably,
there are still no appraisal firms headquartered
outside the USA or UK.

The appraisal community remains varied in

its scope, product offerings and resources.
Appraisal firms range from full service data
and analytics-based platforms providing
multi-product advisory services supported by
valuation and technical teams of 50+ people
through to one- and two-person businesses
offering a narrow range of office-based
services that rely on a network of industry
contacts to maintain a real-time database.
During the 1990s, many of the leading
appraisers underwent considerable upheaval in
thinking and methodology as they developed,
refined and overhauled their modelling,
forecasting and analytical capabilities. In
contrast, the 2000s have so far seen the
appraisers largely quiescent. There have been
some notable exceptions, where basic provision
of data has been supplanted by thoughtful
analytics and insight that leverage off the data,
but many of the appraisers are doing today
more or less what they did 15 years ago, with
perhaps the addition of an automated on-line
service.
This is disappointing, as appraisers now, more
than ever, exert a disproportionate influence
on the views on aircraft values held by all of
the key market constituents. They influence
the level of advance offered on a secured loan,
along with the term and amortisation schedule;
the minimum amount that an airline can expect
to receive when seeking sale and leaseback
financing for a new delivery and the maximum
that a lessor will aim to pay on that same
transaction; they set benchmark levels that
set floors or ceilings in price negotiations for
aircraft trading; accounting impairments may
be triggered by mark-to-market requirements
from lenders or auditors. The impact of even
small variations in values across a portfolio
of aircraft can be very significant, not only
through direct changes to the balance sheet
but also as a result of funding adjustments
triggered under lender covenants and other
financing requirements.

11

Funding the Future

An Assessment of the Aircraft Valuation Business

A Call to Arms
Investing in commercial aircraft has come of
age in the past 15 years, moving from an exotic
asset class through to an alternative investment
during the 2000s and the mainstream
investment opportunity that is now provided
by many lessor platforms. As this transition has
taken place, the demands and sophistication
of investors have also evolved, to the point
where a high degree of rigour, consistency and
transparency is required in all aspects of the
valuation process. If these standards, which
are considered a given in other sectors, are not
met, investors will not have the confidence to
invest in the scale needed to support the future
growth of the industry.
The new standards of rigour, consistency and
transparency will increasingly challenge some
of the outlier appraisers, especially those with
limited resources. Whilst there can be value in
specialisation, only size brings the breadth of
activities to tap all possible data sources, the
manpower to analyse and validate that data
and the IP to develop product enhancements
that leverage the data. Consolidation amongst
appraisers, therefore, is both necessary and
inevitable, but with it must come a willingness
not only to invest in and develop new products,
but also to foster a more open attitude towards
communicating with customers and investors
which increasingly will be one and the same.
As an integral and high profile industry
constituent, the appraiser community needs
to reflect on its role and the ways in which the
various products are prepared and delivered.
Processes, methodologies and data analysis
must all be fit for purpose and provided in a
timely, consistent and rigorous manner.

Responsiveness to changing market conditions

is also now more than ever a core requirement
for the industry. Whilst not advocating that the
appraiser industry should lead the cycle with its
market value reporting, it could arguably move
faster to reflect inflection points such as have
been seen over the past 12-18 months. Clearly,
the fundamental lack of transparency that
continues to be a sad legacy of the industry is
at least partly to blame, as the paucity of timely
trading data points leaves many appraisers
with little to go on to distinguish a genuine
trend from an outlier. Equally clearly, it is not
acceptable to have market value opinions of
one aircraft type and age bracket impacted
by a small number of trades of significantly
older, or younger, aircraft of a similar type.
Proxies work up to a point, but more, and more
relevant, data is ultimately the only solution
to this problem. At the risk of sounding like
a broken record, it is time that the industry
(i.e. lessors and financiers) took another
look at how to break the log jam of secrecy,
without breaking commercial confidentiality or
divulging their unique IPs.

If these standards, which are

considered a given in other

sectors, are not met, investors will
not have the confidence to invest
in the scale needed to support the
future growth of the industry.

12

To summarise, there are 7 key areas where a Call to

Arms for appraisers and industry professionals is
required to focus minds and priorities:

1. Appraisers should be able to demonstrate their

track record of forecasting accuracy in a verifiable
way using approved techniques that that withstand
scrutiny from experienced capital markets fund
managers and investors.
2. Appraisers must become more diligent in ensuring
that changes made to current value opinions are
reflective of the vintage of the asset and do not
rely on the extrapolation of trading data from one
age bracket to another
3. Some valuation methodologies have not changed
in 20-30 years. Appraisers must ensure that their
data sources, analytical skills and IP are at the
cutting edge to meet the standards of rigour and
governance that a $100bn+ per annum industry
demands
4. Appraisers should publish their methodologies,
core assumptions, sample size and volatility data
5. Appraisers must be Thought Leaders, prepared
to raise and discuss the challenging issues and
to share best practices within the appraiser
community
6. More industry professionals are needed to step up
to the challenge of securing ISTAT accreditation,
which would be facilitated by streamlining the
ISTAT certification process without diluting the
standards
7. Appraisers and their customers need to work
more closely with one another, developing greater
mutual understanding through increased openness,
dialogue and transparency

Values and Valuers

An Assessment of the Aircraft Valuation Business

Funding the Future

An Assessment of the Aircraft Valuation Business

13

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Values and Valuers

An Assessment of the Aircraft Valuation Business

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