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Maintenance Matters in Aircraft ABS Deals – Part 1

In this edition of mba Aviation’s Insight Series, the Forecasting & Modeling team looks at the way Maintenance is considered in Aircraft Securitizations.

Key Concepts:

  • Maintenance Value and Compensation are significant elements in Aircraft Asset Backed Securitizations (ABS)
  • The Maintenance Support Account of an ABS is used to fund all future maintenance events for the assets in the portfolio
  • Maintenance Value becomes a larger portion of the overall aircraft’s value as it ages

Maintenance value and the corresponding compensation, typically designated as “Supplemental Rent”, “Reserves”, or “End of Lease Compensation” within a lease agreement, contribute an essential element of value and liquidity within an Asset Backed Securitization (ABS) portfolio.

In an aircraft lease, lessors collect maintenance compensation for utilization on the individual components on each aircraft.  These typically include the airframe, landing gear, auxiliary power unit (APU), engines, and engine life limited parts (LLPS).  The chart below depicts a typical distribution of monthly maintenance reserves over each component, determined by cost and approximate interval of each relevant maintenance item on an A320-200.

Within an ABS deal, maintenance compensation collected from the lessees is funded into an aggregate Maintenance Support Account.  Whereas typical leases will divide reserves into individual accounts to be drawn down at the time each component undergoes maintenance, the Maintenance Support Account is used to reimburse all future maintenance events for the assets in the portfolio, and is only required to have funding over a predetermined “look-ahead period”, typically 12 months.

In addition to supplementing cash flows in a portfolio, maintenance adjustments, as calculated by the cost of a maintenance event and the position of the aircraft in its maintenance life cycle, are applied to each aircraft’s Base Value.  The maintenance adjusted values are then used to assess the overall value of the collateral pool and determine the loan-to-value (LTV) on each tranche of issuance.

As an aircraft ages, the overall value of the asset depreciates.  However, the cost to perform maintenance on each of its components increases over time with inflation.  Therefore, as the asset ages, the inherent value of maintenance in the aircraft becomes a larger portion of its overall value.

Based on the full life market value and the full maintenance value of the components on an aircraft, an approximate run-out value on each vintage of the aircraft can be derived.  The maintenance value to full-life value ratio illustrates how the value of maintenance in an aircraft encompasses a larger factor of the asset’s total value over time. The example below is an estimation of the reinvestment needed to bring an A320-200 back to full-life conditions.

As a result of the dynamic between aircraft depreciation and maintenance appreciation, we find two immediate impacts on ABS transactions over time: First, the inherent maintenance value become a larger component of each aircraft’s value and therefore the overall collateral pool. Second, as lease rates decrease with the decline in overall asset value, the maintenance-related cash flows become an increasing portion of the ABS’s liquidity.

Aircraft Value Update and Insights for 2Q 2018

What’s Driving Values in 2Q 2018?

REDBOOK’s ISTAT Certified Appraisal Team Has the Latest:

Relying upon the current market conditions and the aircraft transactions that have occurred over the first quarter and into the second quarter of 2018, mba has updated and released the 2Q 2018 values on REDBOOK. Below you’ll find the highlights from the update and a look into the most highly traded aircraft of the year.

For a look into current and historical data of the entire global aircraft fleet, mba launched STAR Fleet (System Tracking Aircraft Repository) within the REDBOOK platform.

New Additions to REDBOOK

  • 32 new engine variants and types have been added to REDBOOK including the Trent 1000, GEnx-1B64 and -1B70, and the -5Bs and -7Bs with tech insertion.

Aircraft

  • Mid-vintage A320-200 market adjustment factors increased up to 4% for some years including early 2000 builds. Demand for current generation aircraft remains high due to low fuel prices and neo delays.
  • A350-900 and 787-9 Market Values see market increase of 1% above base as operator and lessor appetite remain strong.
  • A320neo and 737 MAX family aircraft continue to see Market Values equal to Base, though Market Lease Rates are trending below the 0.8% lease rate factors historically achieved by new aircraft, averaging closer to the mid-0.6% lease rate range.

Engines

  • PW4060s saw a boost of 2% over the quarter mainly due to the demand from 747-400Fs and 767-300Fs boosting need for spare engines and parts. Values are expected to climb in the short term.

For more updates on the 2Q 2018 Aircraft Market. Please note, non-REDBOOK subscribers will have limited access.

Aircraft Value Update and Insights for Q1 2018

What’s Driving Values in Q1 2018?

REDBOOK’s ISTAT Certified Appraisal Team Has the Latest:

Relying upon the current market conditions and the aircraft transactions that have occurred at the end of 2017 and into the first quarter of 2018, mba has updated and released the Q1 2018 values on REDBOOK. Below you’ll find the highlights from the update and a look into the most highly traded aircraft of the year.

  • The E2-190, A319neo, 737 MAX 9 and 787-10 have been added to REDBOOK with deliveries commencing in 2018 for all four types.
  • Mid-vintage 737-800 market values continue to see heightened demand, with market values upwards of 2.0% over base.
  • The spread for new build neo/MAX aircraft over the ceo/NG expands as last off the line aircraft are discounted, widening the delta.

Please download the full insight for more updates on the Q1 2018 Aircraft Market. Please note, non-REDBOOK subscribers will have limited access.