Understanding the Factors Driving Engine Valuation

Discover factors that can influence engine value, aircraft’s most capital-intensive asset

Engines, often the most valuable part of an aircraft, held a market value of US$80.09 billion in 2022 and are projected to reach US$123.88 billion by 2028 (Research and Markets, 2023). Given this, understanding the factors that affect engine valuation is crucial for aviation stakeholders like lessors and operators.

Age

Like cars, aircraft depreciate with age, increasing maintenance costs from wear over flight hours and cycles. However, engines typically retain value due to restorable Life Limit Parts (LLPs) (IBA, 2018). LLPs are components restricted to a certain number of flight cycles and would need replacing after reaching their OEM-prescribed limits. Owing to differences in technology present in the aircraft, newer models also typically sell higher than older models.

Maintenance Status

Engine valuation is often described by whether it's in full-life or half-life condition, indicating their maintenance status, namely their position in the meantime between overhauls (MTBO) and LLP life. Market value tends to be higher for full-life engines, accounting for maintenance and LLP replacement costs. While proper maintenance can restore an engine to near-new value and condition (Memon, 2023), the key consideration is the economic viability of restoration versus parting out the engine.

Technical Records

Aircraft records are vital for demonstrating compliance with maintenance and operational standards. These records reflect maintenance status and confirm adherence to regulations, such as airworthiness directives (ADs). Non-compliance can lead to an aircraft being not airworthy, reducing its value as the cost to restore airworthy conditions is considered (Latitude 33 Aviation, 2022).?

For lessors, inadequate record-keeping can decrease the value of an aircraft or engine during resale or lease renewal, as potential buyers or operators would require comprehensive information to assess the asset’s maintenance history and condition. For operators or lessees, maintaining complete technical records is often part of the leasing agreement, necessary to avoid disputes or potential penalties (TGIS Aviation, 2023).

Market Demands

Engine valuation is also influenced by market demand and macroeconomic factors. The value of specific engine types is heavily influenced by their demand and the operational status of the aircraft they power. For example, the CFM56-5B4/3 engine, fitted to the A320ceo, experienced a decline in value as older A320ceo fleets were phased out (IBA, 2018). Overall market condition also plays a role. In strong demand periods, engines above half-life status attract a higher premium; in weaker markets, this additional value decreases. Conversely, engines below half-life status see greater discounts in weak markets and smaller ones when demand is strong (Ackert, 2011).

In summary, the valuation of aircraft engines is truly a blend of diverse factors. This overview is certainly far from exhaustive as there are plenty of other factors such as entry-to-service delays, the reputation of reliability, and macroeconomic factors, such as oil price fluctuation and more that could influence an engine’s market value. Considering the engine's role as a high-value element of aircraft, those in the aviation sector need to stay informed about the variables impacting asset value. Proactive management and understanding of these factors are key to keeping assets in optimal condition and ensuring alignment with overarching business objectives.

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References

Ackert, S. (2011). The Relationship between an Aircraft's Value and its Maintenance Status. Acesso em, 20.

Ackert, S. (2018). Aircraft Maintenance Handbook for Financiers. Aircraft Monitor.

IBA (2018). What to Look for When Valuing an Engine, March 2018. [online] IBA. Available at: https://www.iba.aero/insight/what-to-look-for-when-valuing-an-engine-march-2018/ [Accessed 19 Jan. 2024].

Latitude 33 Aviation (2022). What’s Involved in an Aircraft Appraisal? | L33. [online] Latitude 33 Aviation. Available at: https://l33jets.com/resources/blog/whats-involved-in-an-aircraft-appraisal/ [Accessed 19 Jan. 2024].

Memon, D.O. (2023). Examined: The Extent To Which Aircraft Values & Engine Values Are Intertwined. [online] Simple Flying. Available at: https://simpleflying.com/aircraft-engine-values-relationship-analysis/ [Accessed 19 Jan. 2024].

Research and Markets (2023). Global Aircraft Engine Market: Analysis By Technology, By Platform, By Engine Type, By Component, By End User, By Region Size and Trends with Impact of COVID-19 and Forecast up to 2028. [online] Available at: https://www.researchandmarkets.com/report/aircraft-engine?utm_source=BW&utm_medium=PressRelease&utm_code=stwfql&utm_campaign=1869948+-+Global+Aircraft+Engine+Market+Report+2023-2028%3a+Digitalization%2c+IoT+Integration%2c+and+Advanced+Materials+Transforming+the+Aircraft+Engine+Market+in+the+Era+of+Smart+and+Sustainable+Aviation&utm_exec=chdo54prd [Accessed 19 Jan. 2024].

TGIS Aviation (2023). The Critical Importance of Technical Record Keeping for Aircraft and Engine Lessors. [online] TGIS Aviation. Available at: https://www.tgis.aero/2023/06/23/the-critical-importance-of-technical-record-keeping-for-aircraft-and-engine-lessors/ [Accessed 19 Jan. 2024].