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Concept of Half Life Values Lose Relevance for Older Aircraft

April 15, 2019

Providing half-life values for older aircraft, particularly widebodies, is becoming increasingly irrelevant and in some cases is leading to an optimistic view of the relative value of assets, thereby increasing risk for owners and potentially overstating book values.

The usual method in providing non-maintenance adjusted is to assume half life maintenance standard (unless the aircraft is new in which case it has 100 percent life – although some appraisers indicate half-life even for a new aircraft). As means of ensuring comparative values, this concept of half-life persists whether the aircraft is relatively new or at the end of its service life. When considering a half-life value that accurately reflects the OEM (Original Equipment Manufacturer) list price in terms of the engine Life Limited Parts (LLPs) in particular, this can represent a significant figure. The cost of a set of a LLPs for a widebody can easily cost in excess of $7 million. with two engines, the half life value of the engine LLPs alone is therefore $7 million; add another $5 million to reflect half life on the engines with respect to the shop visit status and no widebody should therefore seemingly have a half life value of less than $12 million. Yet, a 20 year old B747-400 is worth less than $8 million and a 1996 vintage B777-200ERs less than $5 million despite both types having a substantial time remaining on the engine LLPs.

However, just as using a half-life value for a new aircraft does not reflect reality, neither does half-life accurately represent the status of most aircraft once they reach 15-20 years of age. For a widebody with engines that have a LLP life of 15,000 cycles, sector lengths of seven hours and utilization of 3,500 hours per annum, to use up a new set of LLPs when possibly replacing at 20 years would require the aircraft to be operated for another 25 years – equating to retirement age in excess of 40 years. This is clearly not realistic. Consequently the wholesale replacement of the set of LLPs at 15-20 years does not take place unless there are Chapter 5 limits (Chapter 5 imposes lower limits on the LLPs if they are unable to last until the design life) in which case the engine manufacturer will compensate the operator for the lesser life. The assessment of the “green time” (time remaining on the LLPs multiplied by the OEM list price) remaining on the LLPs all too often has become a simple arithmetic exercise isolated from the realities of the market thus distorting the real value of the asset. With respect to the overhaul of the engines, there are different levels of performance restoration and the older the aircraft, the less extensive the performance restoration as an operator realizes that not all the remaining life will be utilized before retirement beckons.

An aircraft that is 20 years of age with therefore likely see LLPs with less than half life remaining yet the value is always assuming half-life. The more appropriate estimation of the maintenance status of the aircraft at 20 years of age would therefore be 25-30 percent life. The half-life value of a 20 year old A330-300 may approximate $15 million but the if 25 percent life is assumed then the value needs to be discounted by $6 million ($3.5 million for the 25 percent life left on the LLPs and $2.5 million for the lesser overhaul status) thus representing a realistic value of $9 million. Even with 25 percent life assumed on the engine LLPs, the aircraft will have another seven years life remaining before they need replacing. There will also come a time when it will be more cost effective to buy a replacement engine or module than to undertake an overhaul and replace LLPs. The return conditions for aircraft, particularly with respect to transactions that took place a decade or more ago may see a requirement for the LLPs to only have 2-3,000 cycles remaining on average with none having less than 500-1,000 cycles with no monetary compensation above this level. This makes it even more imperative that the residual value assumes less than half life.

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