Air­craft Val­u­a­tion and Cal­cu­lat­ing Diminu­tion of Value

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In the course of my tenure in the air­craft appraisal busi­ness, I have often been tasked to make expert wit­ness tes­ti­mony in the area of diminu­tion of value of air­craft. These cases involve air­craft that have been dam­aged, and for bet­ter or worse, have been placed back into ser­vice. The obvi­ous ques­tion then becomes what they are worth at that point.

From these encoun­ters, I have devel­oped the fol­low­ing points to con­sider in cal­cu­lat­ing diminu­tion of value:

Nature of the dam­age — Pres­sure ves­sel or wing tip? Most dam­aged parts on an air­craft can be replaced. Pres­sure ves­sels and basic air­frames must be repaired. The impact on value is reflected accord­ingly, but not always pro­por­tion­ately. An FAA form 337 does not always tell the whole story. Some­times it may not even be in the main­te­nance records if the repair shop con­sid­ers the repair to be like new!

Extent of the dam­age — Per­cent of destruc­tion to each part of the air­craft that has been repaired or replaced. Is the por­tion to be repaired so large that the value of the air­craft may be greater as scrap? Some­times it is.

Time since dam­aged air­craft has waited for repair – Unre­paired air­craft sit­ting in the queue wait­ing for atten­tion is a sad sit­u­a­tion. Some air­craft can sit at the repair shop for months wait­ing for parts, tech­ni­cal repair draw­ings and the exper­tise to ini­ti­ate the work.

Time in oper­a­tion since repair — Dam­age is mit­i­gated over time. The ratio­nale is that if the dam­age occurred sev­eral years ago and was repaired with­out ongo­ing inci­dent, so much the bet­ter. If doc­u­mented trips back to the repair shop are noted, big prob­lems exist with value.

Accu­mu­la­tion of Fixed Costs — Loan pay­ments, insur­ance, hangar rent, pilot expenses and other fixed costs con­tinue regard­less of air­craft status.

Depre­ci­a­tion – Whether your account­ing method is straight line or accu­mu­lated, the sched­ule will change so does the tax ramifications.

Lit­i­ga­tion — Rare is the insurer that sim­ply hands over he check for both the tan­gi­ble and intan­gi­ble expenses related to a dam­age inci­dent. Costs for lit­i­ga­tion can be in the hun­dreds of thou­sands of dol­lars. Good news is that insur­ance com­pa­nies do not want that expense either.

Pro­jected Mar­ket Sit­u­a­tion — Even when the air­craft has been returned to ser­vice and has had sev­eral hun­dred hours in duti­ful ser­vice, what is its worth to a poten­tial buyer who can choose from many equiv­a­lent air­craft with­out dam­age his­tory? It can be frus­trat­ing for the seller.

Com­mer­cial Use – Is the air­craft used in com­mer­cial oper­a­tions? A Part 135 air­craft can gen­er­ate a quan­tifi­able amount of income. That income is absolutely lost while the air­craft is down. More insid­i­ous is quan­ti­fy­ing the loss of mar­ket share that air­craft would have main­tained had it remained in nor­mal service.

Val­u­a­tion Tech­nique — A for­mal appraisal devel­oped from a com­bi­na­tion of detec­tive work, reli­able com­pa­ra­bles and mar­ket review, main­te­nance records inspec­tion, account­ing review and finally a mar­ket analy­sis development.

*Cap­tain Coo­nan is a Uni­form Stan­dards of Pro­fes­sional Appraisal Prac­tice (USPAP) senior cer­ti­fied appraiser. He is an Air Trans­port Pilot with sev­eral type rat­ings and a Diminu­tion Con­sul­tant with a 30-year air­craft oper­a­tion and val­u­a­tion back­ground. He has val­ued more than one thou­sand air­craft val­ued at some three bil­lion dol­lars. Although the major­ity of his work is in the bank finance and insur­ance res­o­lu­tion are­nas, his work has extended to acqui­si­tion and repos­ses­sion assign­ments as well. Cap­tain Coonan’s clients range from the for­tune500 com­pa­nies to the Inter­nal Rev­enue Ser­vice. More infor­ma­tion can be found at www.planesworth.com.

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