Category: Program

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Daniel Hall, Senior Valuation Consultant, Cirium Ascend Consultancy

The business aviation sector has been a consistent growth and success story over past years – flight activity is up, order backlogs have grown, inventory for sale reduced, and notably for us as appraisers, market values have shown considerable increases from Q1 2021 through to the end of 2023. At the time of writing this (December 2023), Market Values in the Business Turboprop through Light through to the Super Midsize categories are up by 48-71% on average, on a fleet-weighted constant age basis (i.e. removing the impact of asset depreciation). The below chart illustrates these changes by size segment category. These are tremendous numbers, but they have brought with them a fundamental question – how does one accurately forecast a residual value following this market value growth, and what is the downside risk to these numbers should (or when), markets normalize towards a more balanced level?

Source: Cirium Values Analyzer, Cirium Fleets Analyzer. Market Value changes are a fleet-weighted average, and on a constant age basis for aircraft up to 25 yr old, Large (removed for analysis) includes high-% low-$ changes to older types including those to small niche variant fleets.

Typically this is where the Base Value concept comes in. The International Society of Transport Aircraft Trading (ISTAT) defines “Base Value” as follows: Base Value is the Appraiser’s opinion of the value of an aircraft (or other aviation-related asset) in a stable market with a reasonable balance of supply and demand…(full definition continues). At Cirium Ascend Consultancy we use the Base Value to forecast a future residual value. By comparing Market to Base Value (as a ratio), it also provides some indication of how the market is for that asset type. Market Values had increased at levels far beyond any appraisers’ expectation, but by mid-2023 it was increasingly apparent that there had been a more notable shift in the market – this wasn’t a usual cycle, and we would not see values fall back to levels last seen in early 2020.

We therefore embarked on a project to review our current, and future Base Value projections, with a focus on the above-mentioned size categories.

We have chosen not to amend our opinions for the Long Range or Bizliner categories; these have not seen the same level of value change and their existing forecasts are proving resilient and accurate for guidance to investors.

There are several fundamentals which have guided us during these revisions:

• We remain in a high inflationary environment. This has driven large changes in new pricing which for the first time in over a decade has shown improvement, by range of 10-30%. Previously, new pricing was relatively static year over year, despite inflation at that time.
• Manufacturers have grown order backlogs to levels not previously seen – now at two-three years for most models. This gives assurance that there will not be over-production or ‘white tails’, thus keeping those gains in new pricing.
• We remain in a supply chain pressured environment – labor, parts, expertise – collectively this has held back abilities to grow production rates, so as above, keeping supply steady at strong demand continues to help pricing, and value retention. 
• The industry has seen many new users (of business aviation) – flight activity has dipped but does remain in the region of 15% up on 2019. Many are now moving to fractional, a sector which is recording growth in its fleet share. These users of fractional may be individual aircraft buyers in the future.
• Cirium Ascend Consultancy’s opinion is that even if demand softened, manufacturers would not be able to drop new pricing. Suppliers (engines, avionics etc.) will have increased their cost to the OEM – this rarely reverses; therefore, we expect these prices increases to stay.
  • Price increases for new / young aircraft helps the entire value curve, as there is a trickle-down effect. Effectively this creates a minimum Base Value improvement of 10-30% by starting point, which can be seen on many types.

We should emphasize that we do expect markets to continue to normalize – therefore Market Values will fall as supply and demand balances. Therefore, our Base Value increases are only so far – but today leaving many Market to Base Value ratios at approximately the 120-130% level, which is a far change from many types which were at 150%+.

The Changes

We have made changes to around 75 business aviation variants. On average, the fleet-weighted average change to our Current Base Value opinion is a 32% increase and the distribution ranging from negative 6.5% through to positive 156%. Just a handful of variants saw a small negative change which was needed as part of this major review. The models with very large percentage increases are off a lower-dollar base, for instance an older Beechjet 400 model where the previous value was below $1.00m. Around two-thirds of change was within 35%, as the below distribution chart displays.

Note – outliers (negative & very large increases) not included.

Each aircraft variant had the following reviewed:

• Current Base Value (starting point).
• Residual Value Curve – based on market value retention performance and competitive landscape.
• Position in the production cycle – we made some revisions on our view of an aircraft type variant in its own technology cycle.
• Residual floor value – our estimation of aircraft part-out / scrap value.
• Changes become effective online from September 1^st through December 2^nd, 2023.
• The HondaJet does not feature below as we made changes to this type in May 2023 following the introduction of the Elite II.

Base Value Inflation – Jan 1 2024

Separate to this review (and the figures presented below) is our inflationary change made to all aircraft Base Values on every January 1st. In recent years we have been reviewing actual US dollar CPI inflation at the end of each year and applying this uplift to New Year values. For 2024, we have inflated all Base Values by 3.1%, both current and future, which is reflective of US CPI-U index (all cities, all goods, not seasonally adjusted) obtained for the 12 months ended 30 November 2023 (as is our usual methodology). We have also applied a 4.1% escalation (1% above inflation) to all maintenance costs, which allows Full-Life values to keep up. The forward default inflation to future curves remains at 2% (unless selected otherwise by the user).

A full summary of changes as-at December 2023 can be found below:

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