Glossary of Aviation & Valuation Terms
The American Society of Appraisers is the oldest and only major international appraisal organization representing all appraisal disciplines. It originated in 1936 and incorporated in 1952. The Society was one of the original founders of the Appraisal Foundation that is recognized by the U.S. Congress for establishing uniform criteria for professional appraisers. That criteria is contained in the Uniform Standards of Professional Appraisal Practice (USPAP).
The number of Flight Hours and Cycles/Landings anticipated to be accrued by an aircraft on an annual basis.
The Uniform Standards of Professional Appraisal Practice (USPAP) provide three generally accepted appraisal approaches (methods to estimate asset value). They are the Cost Approach, the Income Approach, and the Market or Sales Comparison Approach. Appraisers use their expertise to determine the approach that is most relevant for each project.
Cost Approach: This Approach is based on the principle of substitution. It is calculated by taking the current cost of replacement or reproduction new, and deducting various elements of depreciation: physical deterioration, functional and economic obsolescence.
Income Approach: The Income Approach is based on determining the present value of the future benefits of ownership. Calculation methods may use:
- Annualized capitalization method
- Discounted cash flow (DCF) analysis
Sales Comparison Approach: This Approach is also known as the Market Approach. It is also based upon the principle of substitution. It is calculated by adjusting recent sales and offering prices of similar aircraft to arrive at the most probable selling price of the subject being evaluated.
The Asset Grading System Process is a simple-to-understand, uniform methodology – a "grading standard, that assesses the greatest exposure to an aircraft’s value – its maintenance condition – in order to help the owner optimize the asset's financial performance.
The Asset Grading System Process derives the Asset Insight Index, a standardized aircraft rating scale that:
- Objectively analyzes & grades an aircraft's maintenance condition;
- Translates complex technical data into actionable financial information; and,
- Displays maintenance data in "credit report" format.
Utilizing the Asset Grading System Process™, the Asset Insight Index allows one to:
- Directly compare an aircraft to any other make/model aircraft, as well as the average Index for comparable aircraft listed for sale; and,
- Identify aircraft "major sectors" that may need to be addressed (e.g., Airframe; Engine(s); APU; Interior; Paint, etc.) in order to increase the asset’s value.
See Quality Rating.
See Maintenance Exposure.
The Maintenance Exposure to Ask Price Ratio, or ETP Ratio, is a useful indicator of an aircraft’s marketability. It is computed by dividing the asset's Maintenance Exposure (the financial liability embedded / accrued with respect to future scheduled maintenance events) by its Ask Price.
As the ETP Ratio decreases, the asset's value increases (in relation to the aircraft's price). ‘Days on Market’ analysis has shown that when the ETP Ratio is greater than 40%, a listed aircraft’s Days on the Market (DoM) increases, in many cases by more than 30%.
It is important to understand that an aircraft’s ETP Ratio has more to do with buyer and seller dynamics than it does with either the asset’s accrued maintenance or its price. For any aircraft, maintenance can accrue only so far before work must be completed.
But as an aircraft’s value decreases, there will come a point when the accrued maintenance figure equates to more than 40% of the aircraft’s ask price. When a prospective buyer adjusts their offer to address this accrued maintenance, the figure is all-too-often considered unacceptable to the seller and a deal is not reached.
It is not until an aircraft undergoes some major maintenance that a seller is sufficiently motivated to accept a lower figure, or a buyer is willing to pay a higher price, and the aircraft transacts.
To derive the Financial Rating for any aircraft make/model, the average cost to complete each aircraft event comprising the aircraft's Scheduled Maintenance Program is determined. Having compiled the aircraft's maintenance history, the time (calendar, flight hours or cycles) accumulated toward each individual scheduled maintenance event is used to determine the aircraft's Financial Rating.
For example, if an aircraft had only two maintenance components, and if the Remaining Useful Life for one was 25% while the Remaining Useful Life for the second was 75%, their combined Maintenance Rating would be 5.000. However, if the first of these components has an overhaul cost of $10,000, while the second has an overhaul cost of $1,000, their combined Financial Rating would be 2.955 (see below).
See ETP Ratio.
To derive the Maintenance Rating for any aircraft make/model, several variables, including the Scheduled Maintenance Program established by the aircraft's manufacturer and/or other regulatory authority (e.g., the Federal Aviation Administration) have been compiled, and a frequency (grading standard) has been established for specifically identified scheduled maintenance events. For items that do not have specific service life (replacement) limitations, a service life figure has been established based on that component's projected average failure rate. Once a specific aircraft's maintenance history has been compiled, it is compared against the Scheduled Maintenance Program to determine the aircraft's Maintenance Rating.The Opinion of Value provides a general opinion of the current Market Value of an asset. This product includes no market research or general scrutiny of the overall specification and maintenance status of the asset.
The aircraft's maintenance condition on the day it came off the OEM’s production line.
The asset Quality Rating is calculated by averaging its two components: the aircraft’s Maintenance Rating and its Financial Rating. The Quality Rating scale ranges from –2.500 (lowest/worst possible Rating) to 10.000 (highest/best possible Rating), and following is the Asset Quality Rating key:
This service focuses on estimating a future Fair Market Value for a designated aircraft type through a specified calendar time frame. The analysis is based on market data and current indicators.
This analysis details the aircraft's scheduled maintenance event costs anticipated to occur over the next 120 months. The Analysis utilizes the
The maintenance program established by the aircraft's manufacturer and/or other regulatory authority (e.g., the Federal Aviation Administration).
The Uniform Standards of Professional Appraisal Practice are the generally accepted standards for professional appraisal practice and valuations in the United States, Canada, & Mexico. USPAP contains standards for all appraisal services, including Aviation, Machinery & Equipment, and Business Valuation.
Established in 1987, the Appraisal Foundation was authorized by Congress as a non-profit organization dedicated to the advancement of the appraisal profession. By means of several independent boards and based on public input, The Appraisal Foundation oversees the creation, amendment, and interpretation of the Uniform Standards of Professional Appraisal Practice. As a result of these efforts, USPAP is updated to meet the needs of the ever-changing marketplace.
Enforcement of USPAP standards is imposed by regulatory agencies, professional appraisal associations, and client groups. Required by professional appraisal associations and many client groups, USPAP standards are also endorsed by dozens of federal, state and local agencies.
Over its life, USPAP has evolved into an indispensable guide for those engaged in appraisal practice and for clients of appraisal services.