If evaluating any aircraft was simply a matter of utilizing key numerical data about the subject aircraft, then arriving at a final value would involve little more than grinding through a formula. However, the average age of the General Aviation fleet is about 35 – 40 years old and there are many other variables to consider that are not typically captured in spec sheets nor do these variables conform to discrete numbers or ratings. It is somewhat naïve to think that any aircraft under consideration (regardless of its age or hours on its airframe – with the exception of “brand new” of course) has a pristine airframe and all of its log books and maintenance records exist from the time it rolled off the manufacturing floor. Because there is a desire to understand a subject aircraft thoroughly and how key value points impact the final opinion of value, professional assistance is recommended.
Let’s start with the presumption that the objective of a professional aircraft appraiser is to “report” value and not “set” value. If reporting value, then the professional appraiser MUST consider the penalty the market places on aircraft with one or more incidents of damage or airframes that have not been repaired correctly or log book entries that are missing. ANY failure to take these items into account when these attributes exists is more of an attempt to SET value – or arrive at a predetermined/specific result with little, if any, analysis. To properly collect these types of attributes, a field visit is in order which is why on-site examinations are a requirement of signed reports for true professionals in this industry. Otherwise, attributes such as those mentioned earlier are easily missed, misstated or they go unreported by third parties who typically have a financial stake in the outcome of the deal.
Let’s examine the impact of these areas and how they should be addressed.
Missing Log Books or Log Book Entries
If the aircraft is being professionally appraised, the appraiser will not only note the total airframe time but also verify the total time to the best of their ability. This verification involves more than simply looking at the last few log book entries because these entries may be incorrect given the aircraft’s history. During the life of the aircraft the device used to record the total time on the airframe (a Hobbs Clock/Meter or tachometer) may have been replaced multiple times and when these changes occur there should be a log book entry detailing the total time on the airframe along with the new reading on the device (not always “0” hours by the way). Over the years, mechanics may have missed this change or elected to ignore it (and the related offset) or at some point digits may have become transposed and the error is propagated to future entries. In other cases, someone’s calculations may be incorrect or they may have missed one of the device changes. Regardless, without verification the result is the same in that the total time on the airframe may be incorrect. The degree of error may have an impact on the overall value of the aircraft but there is another issue to consider. What if an entire log book or multiple entries are missing? How will the time be verified or can it be verified? This is the type of problem the professional appraiser must address as part of their reporting efforts – but there are even more items to think about when documenting the aircraft’s history.
Log books also detail items such as the registration numbers held by the subject aircraft during its life along with details such as the export or import of the aircraft from/to the U.S (some buyers will not consider an aircraft that has been outside of the U.S. for example). Knowing the previous registration numbers held by the subject aircraft also becomes important when researching damage history as this is the way in which the FAA and NTSB track those events in the U.S. – with the aircraft’s registration number. Knowing what registration numbers the subject aircraft held and when it held them becomes critical as part of the research efforts.
As a result, the market views missing log books or missing entries seriously such that a financial “penalty” is placed against these aircraft. The amount of that penalty varies of course based on the findings of the appraiser and each situation is unique and must be evaluated on its own merits. There is no “one method applies to all situations” or a flat percentage that should be used in all situations because using rules such as this can unfairly penalize or even overvalue the subject aircraft.
There is also a belief among those who perform desktop reports that this type of situation simply does not occur very often therefore it can be ignored but that belief is not based on factual data or field work. In other words, how would the evaluator know about missing entries without examining the log books in question? Routinely, brokers, dealers, buyers and bankers will state that all log books are present (or presume that they are) when there has been little if any effort to verify that position and field research indicates the opposite. Ignoring this situation is unprofessional and more of an attempt to SET value or arrive at a predetermined/specific result. This is one reason why desktop reporting can lead to erroneous results since there is very little effort or research involved.
Damage History
The impact to an aircraft’s value resulting from one or more previous damage events is one of the most confusing aspects in this industry and the confusion is most likely due to the various evaluation methods and misinformation when dealing with these events. What really constitutes “damage” and how much of an impact should be assessed? Once again, research is the key to answering these questions and assessing the financial impact.
Let’s first understand what “damage” really is and its influence on the subject aircraft’s value. There is a difference between routine repairs (replacement of corroded rivets or replacement of wheel pants for example) and repairs from a damage event such as a gear up landing or repairs from a major corrosion event. A review of the log books and related FAA 337 forms will provide most of the necessary information but an aircraft that is repaired and documented properly is NOT a “bad” or unairworthy aircraft. An aircraft with damage history that is repaired properly simply will not command a premium price in the marketplace when compared with similar aircraft that have no damage history – and this is an important point to note because many believe aircraft that have damage history and are repaired correctly are mechanically unsound which is incorrect. On the other hand, there are aircraft which are damaged and repaired incorrectly. These repairs are not likely found in the log book entries (one reason log books become “lost”) and there may be no FAA 337 forms on file or with the aircraft records. These aircraft may, in fact, be unairworthy even though someone is signing off the annual inspection year after year. This type of aircraft or situation is not one that a bank would want to be involved with but without field research they wind up including these aircraft in their lending portfolio – and over extending on the loan as well.
There are also events which may or may not carry a deduction and my favorite example is the damaged wingtip. To repair a damaged wingtip (from a simple ground handling event), the owner has several options and each of these has an influence on the evaluation. One option is to simply repair the damage and the quality of those repairs will impact the overall value as this is considered as “damage history”. For example if the repair did not follow any type of FAA or manufacturer recommended practice, then the impact to the aircraft’s value will be more severe than if the repair is undetectable and meets industry accepted repair practices. Another option is to replace the wingtip but the type of replacement needs to be considered. If a new wingtip is used then there typically is no deduction as the damage was completely removed however if a “serviceable unit” was used there are questions about the replacement’s history (damaged or not, age of the unit, etc.) that would impact the overall evaluation. Obtaining these details of course involves a review of the log books and records in the field along with an examination of the subject aircraft and its airframe.
The extent of damage, how many incidents or repairs the airframe has undergone, the quality of those repairs, the elapsed time since the event occurred and the current condition of the airframe all factor into the analysis. These variables and the associated research are the reason that flat percentages or ignoring damage history altogether are more of an attempt to SET value and not REPORT value. Let me site two common examples.
Consider a piston aircraft that had a simple prop strike and there was no damage to the airframe at all. Normally a new prop is obtained and the engine is either torn down, inspected and reassembled or the engine is overhauled. In some situations an evaluator would deduct a flat percentage from the overall value of the aircraft even though the airframe was not damaged. Now, let’s take the engine off of aircraft A (the aircraft involved in the event) and install it on aircraft B (an aircraft with no events in its past). Would we deduct that same percentage? After all, it is the same engine but aircraft B was not involved in the event whatsoever. As an evaluator, one has to ask – if I deducted X% from aircraft A why not aircraft B since it is the same engine even though aircraft B has no damage events in its history?
The next example involves an aircraft that has a gear-up landing. Aside from the engine and prop work, let’s presume that only belly skin and a few antennas were involved in the repair and no structural issues were encountered (a superficial event). Let’s also say that years later the avionics were completely changed in this aircraft. A flat percentage approach impacts this new equipment – much of which was not even manufactured at the time of the event and certainly not installed in the subject aircraft. It also impacts the interior and any airframe/engine mods that may have been applied over the years even though these mods were not involved either. Given this scenario an evaluator must determine what changes to the flat percentage rule are in order (7% vs. 8% vs. 9%, etc.) and why. At this point, any evaluator is “guessing” more than providing an analytical approach based on factual data. Again, it is more of an attempt to SET value and not REPORT value.
Most individuals who are financing aircraft simply want a number – ANY number and they don’t really care how this number is developed or derived. In some cases, it is not an issue of “being close enough” but more an issue of – should the bank get involved with the financing of this specific aircraft given its damage history and/or missing log books? Although the seller/broker/dealer says everything is fine, shouldn’t the bank use an independent third party to verify this information?
Routinely, banks and bankers elect to trust third party information utilizing desktop reports and make lending decisions whereby they overextend on a loan and even the Loan to Value (LTV) limits are too liberal given the subject aircraft’s details.
If 2008 taught the aircraft financing industry anything, it should have been that this situation (over extending on aircraft loans, lending on aircraft that are little more than scrap aluminum, lending on aircraft that were not “as represented”, etc.) should not have occurred at all. Defaulting on a loan is one thing but there simply was no excuse when recovered aircraft were not as expected or that equipment/documentation did not exist and in extreme cases, neither did the aircraft.
To address this risk, some bank policies have limited their deals to aircraft that are 10 years old or less and lend only to those with exceptional credit ratings. However, these parameters represent an exceptionally small segment of the overall aircraft financing market and it really does not address situations wherein the aircraft still may have major damage history or missing log books. The probability is very low with newer aircraft but it is never “0%” and only field research along with ongoing analysis will adequately protect the bank from future aircraft repossession issues. Newer aircraft experience ground handling events or incidents just like any other aircraft. A better change in aircraft financing policy may involve on-site examinations of the subject aircraft and records by a trained professional.
More information always leads to better decision making and there is no substitute for a report from an impartial third party who physically examined the aircraft and its records. When financing aircraft, make sure you understand the appraiser’s Scope of Work along with the appraisal credentials. Know who you are hiring and what type of report you are receiving as these are keys to successful aircraft financing.
Mike Simmons has written and published many articles on the subject of documenting and evaluating aircraft and worked with a variety of banking clients both large and small as an aviation consultant assisting them in their aircraft financing policies and day to day projects. As a normal course of business, Mike has observed several bankers over the years making questionable decisions when financing aircraft because those questionable decisions were the easy thing to do at that time, the banker may have been unsure about the right action to take (unaware of the services that could have been helpful) or they simply did not have good data to work from – and these are the types of situations that Mike attempts to highlight along with other options to consider. The objective is to help banking clients make solid business decisions based on creditable, reliable information.