Assumptions on Aircraft Economic Life ‘Should Stay at 25 Years’
Aircrafts’ economic life has become a hot topic with many different views promoted about the longevity of aircraft, especially from a financing perspective, with appraisers and sector treasurers under increasing pressure from some sectors of the industry to reduce their current predictions. However, this is not the right course of action, says independent aviation consultancy the International Bureau of Aviation (IBA Group).
IBA cites five major factors that have come into play on the topic:
“The modelling of the economic life of an aircraft considers several factors, one being when the aircraft was built in terms of the production cycle for that aircraft type,” says Dr Stuart Hatcher, head of valuations and risk at IBA. “For example, an Airbus A320 or Boeing 737-800 built in the early stages of that aircraft model’s introduction may remain in service for close to 30 years, whereas a younger aircraft built towards the end of the production cycle may remain in service closer to 20 years.
“On average IBA maintain that their 25 year economic life prediction remains valid and we have no intention of altering that assumption at this time. Although, it is important to add that whilst economic useful life may not change, the shape of the depreciation curve itself may change over time.”
Phil Seymour, IBA president and chief operating officer (COO), adds: “These analyses are not necessarily valid in order to determine what the future may hold. The aircraft acquisition world has changed and will change more rapidly in the next five years with the increasing move towards operating leases. It is no secret that this is the trend, but in practice it is creating more frequent opportunities for airlines and lessors, and/or financiers, to assess the economics of each aircraft on an individual basis.”
“The ‘cycle’ plays a huge part in the decision process. If an aircraft has been financed at high levels it may not be possible, without huge write downs, to simply scrap the aircraft. However, the market may be such that holding onto the asset in a downturn, without it earning revenue, just compounds the problem. Ultimately, we expect the market to correct itself, but it may not be in the next six months – it may take two to three years.”