Financial theory holds that the value of any asset is a function of a number of related factors:1. The stream of benefits the owner of the asset expects to receive.2. The timing of the receipt of those benefits. 3. The risk borne by the owner.Cash flow. Since cash generation is the basic measure of command over the primary means of production, it is ultimately the cash flow to the business that affects its welfare, and therefore, its value.
Control over the cash flows determines who controls the goods and services. The stream of benefits is analyzed from a cash flow point of view, defined as the the net income of the firm plus depreciation and other non-cash charges. Cash flow timing. Since current aircraft sales hav greater value than the same level of future sales, the timing of the cash flows affects the value of the assets.
In the case of aircraft manufacturing, the cash flows is from when the purchase agreement is signed and the deposit is received by the OEM, until the last stage payment is made when the aircraft is delivered to the new owner such, as an airlines, lessor or investment institution. Cash flow uncertainty. Since a business cannot be absolutely certain of receiving future cash flows, an element of uncertainty risk must be incorporated into any valuation model. These risks include:1. Inflation risk as it relates to the changing purchasing power associated with consumption patterns. The producers pricing index, the cost of materials and labor are the main are the inflation drivers.2. Business risk in terms of being able to find a buyer if the investor wants to transfer ownership rights. This is why the presence of "White Tail" aircraft are so imp[ortant. THese are aircraft with no contracted purchaser. THe presenc eof white tails confirms tha tthe manufacturer is building more aircraft than their is demand for i.e. supply exceeds demand. 3. Marketability risk related to the uncertainty the business faces regarding product acceptace, financing cost and product costs. Prfoduct acceptance is evidenced by passenger acceptance of the B737 MAX, the B787 and the engines powering the latest model of the B777. THe greatest uncertainty is if the manufacturers will launch new aircraft designs that will meet the Paris Agreement and ICAO CORSIA Net-Zero emu]issions standardsby 2050. Investor behaviour.For an investor to give up current investment returns, the investor must be compensated for the uncertainty risk of future cash flows. This is usually expressed in terms of indexed ROI, based on 10 year treasuries. rising inflation is driving ROI expectations higher, to levels that may force aircraft lease rates higher.In pricing transaction equity, the investors factors in:1. The current market value of equity.2. Dividend payment for each time period.3. The investor's required rate of return.4. The expected long term growth rate. The market value of equity is how much investors think a company is worth today.It is the same as market capitalization and they are calculated in the same way. Multiplying the total number of company shares outstanding by the current market price of each share.
The present value model pprovides the theoretical basis for the earnings and/or earnings capitalization. More complex expressions of value can be constructed to consider cash flow, timing and risk considerations. Aircraft valuation approaches.Definition of market value, cost & income. Definitions of valuation, appraisal, and market value change over time and definitions vary by industry and country. Reference should be made to the applicable valuation standards in a valuation report. It should consider:
1. The status of the aircraft fleet with respect to the transition from gas turbine engine power to Net-Zero propulsion systems. 2. Surplus capacity or scarcity of supply and the validity of the balance sheet identity. 3. Aircraft productivity.4. Asset Residual value.5. Systems components on the landing gear, hydraulic pumps, valves, actuators, and other complex sysyems. 6. Quality of maintenance - airframe.7. Quality of maintenance - engines.8. Damage history.9. Overstress due to hard landings. 10. Corrosion status.11. Modification status.12. Completeness and continuity of records. 13. Age and base value. 14. Replace, reproduction, liquidation cost.15. Analysis of residual value techniques.16. All valuation approaches must be considered, market, income and cost, and one selected.17. The three methods for business valuation are asset valuation, capitalized income and securities (Stock & debt) market valuation.18. Market valuation relies on the efficiency of values determined in the financial markets 19. If no comparibles are available the appraiser can select another approach to appraisal. 20. The appraiser builds up an aggregate market value by appraising the individual assets. 21. The capital income method differs from the others in that the analyst determines asset value by making a forecast of future net cash flows received from the use of the business's assets.22. If the cost approach is selected consider A good place to start maybe to identify "undisputed facts" that have been evaluated in court cases and can be layered over the pricing, trading and financing practices widespread in the aircaft market:1. The courts recognize that Appraising is an inexact science.2. Estimate of value is an opinion and can be evaluated by an opinion.3. The courts recognize that two or more reputable appraisers may disagree as to market value.4. A judgement of the court with respect to an appraisal is based on a preponderance of the evidence. 5. It is not possible to state as a fact how long an asset will last.6. There is no way to prove percentage of depreciation except as opinion.7. There is no way to predict accurately the rental/lease income into the future.8. No one is expert enough to know what an asset may sell for at a particular time. 9. No appraiser should consider their opinion as infallible.10. Opinion of market value is what the appraiser thinks the aircraft is worth and no one really knows the exact value of appraised assets.11. Where more than one appraiser is appraising, rather than averaging the approaches, the appraiser makes a judgement call to select the approach that they deem most applicable to the appraisal situation.12. All appraisals should be updated between 1-6 months periods.13. The appraiser speaks as of the date of the appraisal and no other. 14. No appraiser can foresee what the economy is going to do.15. Appraisals are a projection and an estimate of value as of the date of the appraisal.16. The valuation framework should be fine-tuned for new aircraft technology, especially with respect to methods of manufacturing, the internet of things as applied to aircraft and post-new cyber security, incidents and accidents. Such an appraisal process will take many years to take shape. 23. Economic rent or lease rate (interest).24. Aircraft specification & condition factors.25. Income stream uniformity or lack thereof.26. Interest rates (cost of funds).27. Price comparibles.28. Specification or bespoke configuration.