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Residual Values And The Aftermarket

Maintaining asset values driven by market factors.

Ex-Ryanair executive Howard Millar launched a new aircraft lessor this week as he outlined plans for a $250 million IPO to raise initial investment funds.

Part of the pitch to potential investors in Sirius Aviation Capital concerned residual values of the mid-life aircraft the lessor intends to acquire.

Acknowledging that “engine values underpin future aircraft values”, Sirius stated that long-term engine values are based on manufacturers’ “de facto monopoly on spare parts” and annual price rises thereof.

However, in an article for Engine Yearbook 2019, Abdol Moabery, CEO of GA Telesis, argues that a deep and diverse aftermarket is, in fact, the key to maintaining future engine values.

He gives the example of Boeing 777 engines that are maintained through most of their lives by the OEM using only OEM parts.

“Before the first aircraft left service for teardown there was no aftermarket for leasing or trading and there was no part-out market because the OEM would not install used serviceable material from part-out engines traded in the open market. The result was that as aircraft came off lease or were retired, their values dipped significantly below forecasted residuals.”

In one case residuals dipped so alarmingly that Moabery says one lessor claimed to have smelted its engines rather than pay storage costs.

“It is short-sighted to examine this issue without considering how a heavy-handed OEM strategy can hurt the long-term values of assets,” he writes.

“An open and robust market will not only enhance [the OEMs’] engines’ lasting viability, but will also ensure that investors are there if the OEMs ever decide to change their [aftermarket] strategy.”

For more about the aftermarket’s impact on residual values see the forthcoming Engine Yearbook 2019.

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