ISTAT Jetrader - Summer 2020 - 38

are core to appraising and become
constructive tools when overlaid with the concepts
of "highest and best use" and "value in use." Both of these
notions will undoubtedly see further scrutiny as potential
opportunities start to take on variations to the usual pricing
models that now have to account for a lack of income and
potentially a different residual construct for the transaction.
As well, auditors will have to challenge assumptions provided
for "value in use" as additional lease terms and subsequent
assumed cash flows may no longer be viable.
In a market where an aircraft might not have much
liquidity, it is essential to think about some of the fundamental
definitions that guide ISTAT Certified Appraisers, especially
in light of the overarching relationship between intrinsic and
current value. The definitions below are critical components
of our valuations and will help provide valuation guidance in
an environment where data on trading is limited.

Base Value vs. Market Value
Base Value is the underlying intrinsic value of an aircraft or
other asset, and not necessarily always the highest value.
As recently as the beginning of the year, many appraisers
had Market Value exceeding Base Value for many aircraft
types, reflecting the then-strong demand. Now the pendulum
appears to be swinging in the other direction. When looking
at appraisals, especially between those issued at the end of
last year and now, it is important to look at that delta between
these two value types, and then distil how the appraiser
relates these two values and the assumptions that support
their respective methodology and to provide proper guidance
on their values.
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* T H E O F F I C I A L P U B L I C AT I O N O F I S TAT

Market Value vs. Lease
Encumbered Value
Current Market Value is the "spot" trading value of the
asset in the current market. This value is for a "naked,"
or unencumbered, aircraft. Lease Encumbered Value
discounts rental stream cash flows and the asset's residual
value at lease-end based on expected return conditions
and an appropriate discount rate. However, with many
lessees proposing power-by-the-hour constructs without
any real minimums or base monthly rental, any assumed
cash flow becomes an arbitrary exercise. Critical to this
analysis is the actual technical return of the aircraft
(forecasted or otherwise) and how this relates to previously
negotiated return conditions vis-a-vis any expected endof-lease compensation, and what kind of value that might
constitute at return (full-life, half-life, run-out or something
in between).

Current Value vs. Residual Value
ISTAT defines Residual Value as the value of an aircraft,
engine or other item at a future date, often used in
connection with the conclusion of a lease term. Future
values are loosely defined among appraiser methodologies
and can be presented under various differing assumptions.
The future values one usually observes in an appraiser's
valuation publication or database tend to be constructed
from Base Value, which, as we have previously noted,
would be the intrinsic value of the asset over its lifetime in
an assumed stable market, and not necessarily a "future
market value." Any future market values are likely to be
ISTAT Jetrader - Summer 2020

Table of Contents for the Digital Edition of ISTAT Jetrader - Summer 2020
