Residual Values in Helicopter Leasing
By Sharon Desfor, ASA, HeliValue$, Inc.
There are two types of residual value analyses, and they do not comfortably co-exist. One type calculates usage directly on an annual dollar-per-flight hour basis, assuming a constant market, with no past or future inflation taken into account.
The second type calculates current versus low markets, accounting for past and optionally future inflation, and assuming the helicopter remains in one component status or possibly moves from one component status to another lesser status (for instance from New to Mid Time) over the term of the lease. This is the type we will addressing here.
Replacement Cost New: Either the OEM’s current new price, or the historical cost of the most recent production year of the asset trended for inflation.
Physical Deterioration (physical depreciation): Loss in value due to consumption of an asset’s life. Maybe be “curable” or “incurable.” Curable deterioration is characterized by the economic feasibility of repair. Incurable deterioration is characterized by the economic infeasibility of repair.
- In a helicopter, by means of overhaul or replacement of its components, physical deterioration may be cured at a cost less than the value of the helicopter; therefore, physical deterioration due to regular flight time is curable.Physical deterioration due to accident or incident may be curable or incurable.
Functional obsolescence (functional or technological depreciation): Loss in value due to factors inherent in the asset itself when compared to its current modern replacement.
- In a helicopter, the amount of functional obsolescence is typically the value delta between the subject helicopter and the most recent variant in the same series.
Economic obsolescence (economic or market depreciation): Loss in value due to factors external to the subject asset. In its simplest form, it’s the difference between the depreciated Replacement Cost New and the observed market price for a comparable machine.
Fair Market Value (FMV): is an opinion expressed in terms of money, at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts, as of a specific date.
Orderly Liquidation Value (OLV): is an opinion of the gross amount, expressed in terms of money, that typically could be realized from a liquidation sale, given a reasonable period of time to find a purchaser (or purchasers), with the seller being compelled to sell on an as-is, where-is basis, as of a specific date.
- Source: Machinery & Technical Specialties Committee of the American Society of Appraisers – July 25, 2010