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Improving Valuations, January 2017

Dick Forsberg, Head of Strategy for Avolon, published a challenging thought paper last year assessing aircraft appraisers. I want to respond to Dick’s thoughts wearing two hats – as the CEO of IBA, a leading aviation consultancy with some 30 years’ appraisal experience and data, and as the current chairman of the ISTAT International Appraisers’ Program. The timing is right for three reasons – Dick makes many excellent points that need to be kept front of mind as our industry develops; 2017 will likely be the most volatile market for years making appraisal opinion even more important; and Dick and I will debate our respective positions at the AFJ conference in Dublin and this serves as a prelude.

Full disclosure – some of Dick’s themes sting a little. I’m keen to move the discussion forward rather than simply defending appraisers that, in the main, do an outstanding job in difficult circumstances. ISTAT, IBA and I imagine other leading appraisers are all investing in improving methodologies and it is fair to suggest that improvements are needed.

Dick concluded his paper with a call to arms around seven areas and I will tackle each shortly. Before I do so, there are two overarching themes that I think need addressing for context. The first is that all large privately owned assets, from a car to a house to an oil tanker, warehouse, skyscraper or aircraft experience a range in values driven by a myriad of internal and external market forces. Aircraft are expensive so a 1-2% fluctuation in values often equals millions across a portfolio. I firmly believe that it is healthy therefore to have a range of opinions to consider, agreeing with Dick that more transparency around the methodology would be helpful.

Appraisals serve a multitude of purposes. They may be used by an insurance company or airline that wants to confirm the insured value is sufficiently high to cover replacement costs or on the other hand may be used by a debt provider concerned with requiring a value in the case of default. The differences are of course significant. By way of example, the insured value of a typical five year old B777-300ER may be $150mUSD. But for a lender it may be a decision based on lending 70% of the CMV of $100mUSD. For a lessor placing the aircraft into an ABS structure the value may be $115mUSD.

Secondly, at IBA we do experience resistance to conducting the appropriate level of appraisal for strategic deals – in essence there is a perception that desktop research will do when, in our view, it is not adequate. Clearly as a commercial organisation there is a perceived desire for IBA to increase revenue and therefore push for extended or full appraisals but in reality that is not the driver. Desktop and online valuations are an essential component of our industry, but are rarely adequate for lease-adjusted appraisals, portfolio acquisitions or capital market activity.

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