As published in BusinessAir Magazine Issue 2, 2017.
As an economics major we were taught that economic models were based on rational behavior. It seems like more and more there does not to appear to be any rationality in many markets, let alone the aircraft market! This makes many of our past buying behavioral models suspect or outright wrong.
The premise within the appraisal community is the standard appraising language stating: the Current Market Value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. (Treasury Regulation Sec. 20.2031‐1[b])
The components of this concept are:
- Price at which property would change hands
- Between a willing buyer and willing seller
- Neither party under compulsion to buy or sell
- Both parties having reasonable knowledge of all relevant facts as the valuation date
- The sale is made to the ultimate consumer in the appropriate market level
Market Value is similar to Current Market Value except that the provision for lack of compulsion to buy or sell is removed and the assumption of a sale within a specified time frame is added. The federally accepted definition of Market Value as stated in the Definition Section of USPAP is as follows: The most probable monetary amount which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the monetary amount is not affected by undue stimulus.
Implicit in this definition are the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
- Neither party under compulsion to buy or sell
- Both parties are well informed or well advised, and each acting in what he considers his own best interest
- A reasonable time is allowed for exposure in the open market
- Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
- The monetary amount represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale
A careful examination of the above provides some valuable insights into all markets, and the aircraft market specifically. If we are looking at the grain market, there isn’t much difference in grain, in fact in some cases, some commodoties even come with their own quality grade and only trade within the grade. Buyers will not buy at a price too high, because they can buy the same product from someone else at a reasonable price. The volume of transactions are large and they are most often traded in open markets. The back and forth negotiating describes rational, informed buying behavior.
The aircraft market and many other similar markets are not as rational and many times buyers and sellers are not well informed. Information is hard to come by and many times there are several variables that can make very large swings in valuations. Plus, the emotional aspect of one plane having just the right color combination and all of a sudden you have an irrational market. Decisions made without understanding all of the facts can be very misleading. The other factor that does not help lead to rationality is the low number of transactions between often highly different aircraft. How each person values certain attributes can be unique to their own personal intention. A case in point is a certain option that has value to one buyer but not the other. If it is a popular option the appraiser will add value to the plane having the option. However, the buyer might not pay anything as they do not plan to use the option and, it could be of little added value due to technology for residual value calculations. (Think of a second ADF a few years back, or GoGo for a buyer in India)
To acurately deciopher complicated, complex markets, like the aircraft market, takes time and expertise. As the saying goes, the devil is in the details and knowing a good deal and a bad deal could be the difference in a very expensive missed detail. Understanding the behaviors of the market and that they may not be rational is a good start in making a better decision.
Mike McCracken
President
Hawkeye Aircraft Acquisitions
