Ascend by Cirium has made the decision to change the year of build methodology from first flight to delivery date, find out why below:
Determining an aircraft’s year of build, (which we take to be synonymous and use interchangeably with the terms “year of manufacture” and “vintage”), has never been without controversy. The aircraft manufacturing process is not always seamless and there are often gaps between an aircraft rolling out of the factory door, making its first flight, and being delivered to the customer. For an established single-aisle programme such as the 737 or A320 where production is running at steady-state and high volumes, the gaps between these dates can just be a matter of weeks, meaning that most of the time, all three dates fall within the same year, making it relatively easy to determine the year of manufacture. However, issues start to arise when one or two of the dates are in a different calendar year to the third.
Historically, Ascend by Cirium’s predecessor Airclaims used the roll-out date to determine year of build. The problem with this methodology was that not all aircraft manufacturers provided us with this date, meaning that there was sometimes a discrepancy between how aircraft coming from different OEMs were being treated. As a result, we switched to using the first flight date, approximately a decade ago. This approach was a lot more rational and easy to defend: our data capture for first flights was much better than it was for roll-out dates, (even if the manufacturer didn’t tell us, we had other sources), but more importantly, it was difficult to argue that once an aircraft has flown and been subjected to the stresses of a test flight, including pressurisation, it was not yet “manufactured”.
However, problems continued to arise with this method. On twin-aisle aircraft, as well as corporate jets where the cabin interior fitting process takes longer, delivery date was often several (if not many) months later than the first flight. At their peak production levels earlier this decade, approximately 5% of Airbus A330s and Boeing 777s, and almost 50% of Airbus A380s were being delivered in a calendar year subsequent to the one in which they first flew. The ferry flight for the A380 from Toulouse to Hamburg, where the aircraft would continue the manufacturing process with interior completion, was the main reason for the 50% figure on that type.
Furthermore, most aircraft are delivered with their maintenance zero-timed on the date of delivery, so airframe inspection clocks don’t start ticking until the aircraft is delivered, and often engines would also be certified as zero-time to wipe out any hours or cycles they accrued during testing (after inspection by the OEM). We recognised this phenomenon in our maintenance adjustments on desktop valuations, but it still added fuel to the fiery debate.
So why is year of build such a big deal?
The answer is quite simple: financing. Aircraft are financed on delivery, not at first flight, and most banks or financiers require an appraisal based on the delivery date. If an aircraft is delivered in a year subsequent to that of its first flight, it has a lower appraised value (until now, with Ascend by Cirium appraisals), making it difficult for the customer to finance the asset to its full value, and effectively resulting in a lower loan-to-purchase price ratio due to the lower valuation.
On a high-value, twin-aisle aircraft such as a 777-300ER or A380, the loss in value between the year of first flight and the year of delivery can be substantial, sometimes exceeding $10 million (especially if the customer is just looking at an online valuation and not adjusting for maintenance condition). We used to remedy this by performing cusp and utilisation adjustments on a desktop valuation basis for such aircraft, especially where two sisterships are flown on opposite sides of the 1 January date but delivered together in the new year. These adjustments would close the value gap but still not make the two values completely equal. Aircraft were essentially being penalised for having flown in December instead of January.
Lessors and other customers who caught wind of the issue started to instruct OEMs not to fly their aircraft in December unless they would also be able to deliver in December. Although this may appear comical at first glance, it isn’t quite so funny when looking at the multi-million dollar shortfalls in financing. We acknowledged that it is of significant impact to our clients and shouldn’t be necessary, because in reality, the market would view the aircraft as “brand new” (as long as the gap between first flight and delivery date hasn’t been too long).
Why did we resist switching to delivery date for so long?
Every now and again, there are aircraft which do not get delivered for several years after their first flight. This could be because they were built as “white tails” (without a specific customer in mind) during a downturn, although this doesn’t happen so much anymore, or it could be because the aircraft was being used as a test aircraft or demonstrator by the manufacturer before being given a quick refurbishment before delivery to an airline customer.
In these outlier cases, there is indisputably a market discount for the fact that the aircraft has accrued a considerable number of hours and cycles in its test flying or demonstrator regime, as well as calendar months for parked white tails that have been kept in storage, during which corrosion may have occurred. This is even more prominent for test aircraft subjected to stresses that are at the limits of the flight envelope and beyond what the aircraft may experience in ordinary commercial operations.
Whenever we have seen such aircraft trade, there has indeed been a discount from the manufacturer to the customer in most cases, as we would expect, and that discount has been passed on in subsequent transactions happening in the secondary market, including sale-and-leasebacks.
Therefore, from a strictly academic viewpoint, if we were to apply a blanket methodology across all aircraft types, it made sense that the first flight date should be taken as the date of manufacture. However, practically speaking, we found that the number of aircraft that are indeed such outliers represent less than 1% of all deliveries, whereas those delivered in a calendar year subsequent to their first flight date but with a gap of only a few weeks or months could exceed 5% in some aircraft classes. As such, we were being punitive from an appraisal perspective on aircraft that the market would not penalise in any way, just because of a handful of outliers that represent well below 1% of the fleet.
What will Cirium’s new approach be?
Starting from August 2019, Cirium will be changing its methodology to define year of build as the year in which an aircraft was delivered. This will alleviate any problems for aircraft that just barely straddle the new year, and we believe will be more reflective of how the market views the value of such aircraft in the vast majority of cases.
However, it is still our responsibility as appraisers to capture those aircraft where there has indeed been a long time between first flight and delivery date. Whenever an aircraft has had a gap of more than 12 months between these milestones, we will still default to the first flight date to determine the year of build, and online users of Values Analyzer will receive a pop-up warning highlighting this fact, in the same way that they already receive a pop-up if an aircraft has been in an accident. The pop-up will highlight the length of time between first flight and delivery date and encourage users to contact Cirium for a more detailed desktop valuation where we can take into consideration all the details of the specific MSN and how the market would view that aircraft.
There will also be a note in PDF and Excel downloads of online valuations of such aircraft to alert any third parties that may be involved in funding the aircraft of its situation.
What are the benefits of the change in definition and how will my portfolio be impacted?
Overall, we believe this year of build definition change will make our values more accurate and reflective of how the market actually views and trades aircraft. It will also reduce the need for desktop appraisals on “cusp” aircraft that straddle the new year, while keeping an eye out for outliers such as white tails and test aircraft and encouraging more diligence in appraising those outliers correctly. The change will be beneficial to all parties making use of aircraft appraisals.
A small number of aircraft may see a one-off increase in value as a result of their year of build changing, which should not be too significant (except for the largest and newest jets), and where applicable, will be a correction of how the market views such aircraft. Of course, the older the aircraft, the smaller the benefit will be (if any). The change may also cause a slight reduction in the average age of some portfolios containing such aircraft.
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