The Foundation and Economics of Aircraft Valuation

Aircraft valuation and the projection of its future price is an intricate process. The following three chapters provide a comprehensive review of the fundamental concepts of aircraft valuation, various approaches for valuation and present a methodology that estimates commercial aircraft value. The “value” of an aircraft certainly depends on internal factors directly related to the aircraft’s specifications and conditions. Some examples of these are the aircraft’s age, size, capacity, fuel efficiency, and maintenance status. In addition, the aircraft value depends on external factors such as the economic cycle, the spread of communicable disease fuel cost, and environmental regulations. The external factors are crucial because they indicate where in the aviation industry cycle the aircraft is, and this, in turn, has the most significant impact on aircraft value. The dramatic drop in the number of airline passengers due to the COVID-19 pandemic is threatening the viability of many airlines and even the rest of the aviation industry. As a result, the values of many aircraft such as the A380, the B747-400, and the B777 have collapsed, and others such as the A330 and B777-300ER are struggling. Narrow body aircraft values fell by around 15–30%, and wide body aircraft values by between 20% and 45% during the pandemic. Boeing reduces forecast for new aircraft demand, expects coronavirus pandemic to hurt sales for more than a decade. Consequently, the theoretical value of a commercial aircraft highly depends on the economic environment and the assumptions underlying the specification of the valuation model. By examining the relationship between an aircraft’s physical and operational characteristics, the key parameters in an aircraft pricing model will be developed. This chapter will cover the following topics: