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KPMG postulates a 22yr aircraft economic life +/-3yrs newTech/oldTech

Posted: Mon Feb 24, 2020 2:19 am
by amdiesen
KPMG has been analyzing the concept of aircraft useful life and the industry’s 25 year rule of thumb. Their current era conclusions are aligning around a 22 year useful life thesis, framing a plus/minus around newTech/oldTech. They have expressed loose satisfaction for a 25 year life for newGen aircraft.
..lenders as well as rating agencies and investors are sort of converging around that 22 year number.
while there can be factors justifying an increase or decrease in the rate of depreciation, most respondents agree that the 25 year depreciation policy for new technology aircraft is reasonable.
https://assets.kpmg/content/dam/kpmg/ie ... iation.pdf

Calculating a market-to-market value of an aircraft is difficult as the market is grey and includes an array of variables, many of which would be unknown without firsthand knowledge of the transactions. Further, while straight-line depreciation is a valuable tool, it is inefficient in modeling an aircraft’s economic value over a discrete period in time.
Valuing assets accurately for sale and secured transactions has been, and is, a hotly debated subject. One of the problems is the paucity of publicly available market data for appraisers to access to be able to accurately value aircraft.


One of the persistent themes in life is getting value from a purchase over time. Time and money are finite resources. Salespeople represent the antithesis of wise consul. Motivated by creating a transaction, they are one of the pressure factors disregarding decision maker time and distorting value propositions.

Would the reader consider that the ANetters assume roles as armchair C-Suiters… Using ANet as a posting outlet, they turn the tables from the pressure they face at home as the spouse and kids are experts in manipulation attempts to direct family resources. The biased reflective behavior is more of an impulse as most have industry knowledge and seek to expand their data driven perspectives.

Post objectives:
* How does this affect purchase discussions? If a B787/A350 are 25 year assets and B777/A330neo are ~19? year assets; how does this affect your thinking on many of the ANet asset topics being discussed?
* Costs can be factored by: 1) Aircraft economic depreciation used + financing, 2) labor, 3) fuel, 4) gate costs…. When discussing factor 1, how does newTech v. old Tech factor into a discussion?
* How does aircraft depreciable life factor into elasticity of revenue? IE, industry revenue is comparatively elastic and the effect of shocks can be pronounced. Richard Anderson intuitively knows the costs of grounding planes with respect to economic depreciation and financing. He also has experience based knowledge on economic cycles and the speed at which it can affect an airline. This is in contrast to current decision makers career variability experiences.
* What is a relevant freighter useful life expectancy with bounds? How do conversions factor into the topic's dimension?
....

The topic holds relevance to the boundaries of common knowledge on the board. The post attempts to present analytical perspectives and global views of decision makers versus prescribing superficial solutions in a way that is meaningful to data driven board participants.

Re: KPMG postulates a 22yr aircraft economic life +/-3yrs newTech/oldTech

Posted: Tue Feb 25, 2020 4:00 pm
by JustSomeDood
While its a start, to divide aircraft economic life between current tech and old tech is way too simplistic IMO.

At the very least, it would be essential to divide between narrowbodies and widebodies, with the former having longer useful economic lives as they have a wider operator base. An A320neo built in 2016 might have a 25 year economic life but an A330ceo/777 built in 2016 would struggle past 15/16.

Other extrinsic factors (apart from the ones you mentioned) can also meaningfully affect aircraft economic life. For example, the MAX debacle would, counterintuitively, reduce economic life for many mid-life leased NGs on the market. This is because lessors have been able to make their NGs stay with their first operators longer, and at higher rentals, than the operators would like. If done right, it allows lessors to extract economic value out of a/c quicker as it takes away much of the remarketing risks/costs with finding a new lessee on often less favorable lease terms. An NG that was lucky enough to be in line for this treatment could feasibly be parted-out in 16-18 years not because the A/C won't be attractive for somebody anymore, but because the owner can lock in good returns at that point without taking on more risk with leasing to airlines (most of which have terrible finances) .

Re: KPMG postulates a 22yr aircraft economic life +/-3yrs newTech/oldTech

Posted: Wed Feb 26, 2020 7:10 am
by speedbird52
25 years? *laughs in British Airways and Delta*

Re: KPMG postulates a 22yr aircraft economic life +/-3yrs newTech/oldTech

Posted: Wed Feb 26, 2020 4:41 pm
by amdiesen
JustSomeDood wrote:
While its a start, to divide aircraft economic life between current tech and old tech is way too simplistic IMO. At the very least, it would be essential to divide between narrowbodies and widebodies, with the former having longer useful economic lives as they have a wider operator base.

In support of this thesis; you could re-frame your argument by postulating fuel economy importance (in relation to tech evolution)? Narrowbodies are more likely to find a second life filling shorter term cycle duties where fuel economy is less important? And narrow-body breakeven allows lower utility?

JustSomeDood wrote:
An A320neo built in 2016 might have a 25 year economic life but an A330ceo/777 built in 2016 would struggle past 15/16.

Their argument would likely be that your A320neo would have a longer than average life; ~30 years. And the A330ceo/777 would have an end-of-line differential penalty. However affecting the 'struggle'; there is a likelihood that the A333ceo will have a second life as a freighter, and the 772 would unlikely have a second life in the air. (interesting that the 773 has been resilient)

Much like Stephen Hawking, there is a quest for a defining equation that explains ‘everything’. An ANet derived model (formula) could be representative (eight factors).
Differentials (factors) ranked by eyeballing importance:

1) derived average age, industry opines 22yrs

2) newTech/oldTech (kpmg discusses)

3) beginningGeneration/end-of-line (kpmg discusses)

4) stretch/shrink (imo)

5) airline strength/weakness (your opine, supported on the opposite side of the spectrum by our colleague)
speedbird52 wrote:
25 years? *laughs in British Airways and Delta*


6) airline reputation (a frame leased to Shaheen air was recently scrapped at 11.5yrs; ~6 years before the derivatives current expectation)

7) airframer maturity: As Airbus had worked toward becoming a comparatively mature airframer, a number of their variants fell short of a mature average. As Boeing has fallen into a period of ‘strategic misdirection’, the product suffers. Etc…

8) freighter conversion utility

Re: KPMG postulates a 22yr aircraft economic life +/-3yrs newTech/oldTech

Posted: Wed Feb 26, 2020 10:38 pm
by BWIAirport
KPMG can decide the useful life to be whatever they want. They, EY, PwC, Deloitte, and hundreds of other smaller firms are simply enforcers of rules set forth by entities like the SEC, PCAOB, IAASB, and AICPA. As far as I know, standard useful lives for assets are guidelines or suggestions. If a company typically uses a machine for 12 years instead of an industry average of 10, they will depreciate it over 12 years. The only time this would matter (aside from a slightly different depreciation expense) is if an auditor flags it.
Let's say KPMG sets this standard of a 22-year useful life. If they go to audit Delta, who has 30-year-old 757s, and notice they're depreciating their newer A321s over the same time, they'll certainly bring it to the company's attention. But if Delta can present their case as to why this is more representative of their company and prove to KPMG (or whoever audits them) that there is no intent to misrepresent or deceive, they'll be good to go.

Re: KPMG postulates a 22yr aircraft economic life +/-3yrs newTech/oldTech

Posted: Thu Feb 27, 2020 6:08 pm
by PPVRA
BWIAirport wrote:
KPMG can decide the useful life to be whatever they want. They, EY, PwC, Deloitte, and hundreds of other smaller firms are simply enforcers of rules set forth by entities like the SEC, PCAOB, IAASB, and AICPA. As far as I know, standard useful lives for assets are guidelines or suggestions. If a company typically uses a machine for 12 years instead of an industry average of 10, they will depreciate it over 12 years. The only time this would matter (aside from a slightly different depreciation expense) is if an auditor flags it.
Let's say KPMG sets this standard of a 22-year useful life. If they go to audit Delta, who has 30-year-old 757s, and notice they're depreciating their newer A321s over the same time, they'll certainly bring it to the company's attention. But if Delta can present their case as to why this is more representative of their company and prove to KPMG (or whoever audits them) that there is no intent to misrepresent or deceive, they'll be good to go.


There may not be a hard rule, but there are standards that are not easy to bend. It’s too easy to overstate income by manipulating these rules, especially in light of how big an influence they would have in this industry. It’s more likely that Delta uses standard rules and just keeps operating aircraft once they’re fully depreciated. This seems to be the case just based off public comments I’ve heard over the years.

What’s surprising to me is that they use such a simplistic method like straight line depreciation. You’d think hours on the airframe and cycles would have been used.

Re: KPMG postulates a 22yr aircraft economic life +/-3yrs newTech/oldTech

Posted: Sat Feb 29, 2020 4:38 am
by amdiesen
BWIAirport wrote:
KPMG can decide the useful life to be whatever they want…
Let's say KPMG sets this standard of a 22-year useful life. If they go to audit Delta, who has 30-year-old 757s, and notice they're depreciating their newer A321s over the same time, they'll certainly bring it to the company's attention…

Would you consider my teasing out two ideas
1) KPMG consulting v. KPMG accounting: The consulting side is providing advice for decision makers (a topic interesting to a larger universe of pontificators), the accounting side is interpreting actions taken, and reporting in accordance with standards (comparatively less interesting to discuss)
2) Economic versus accounting depreciation. Developing an economic model that projects amortization over time is useful for a patina of ANet threads. Using your example, we could engage conversations on used 757s versus new 321s within a number of contexts.
PPVRA wrote:
There may not be a hard rule, but there are standards that are not easy to bend… It’s more likely that Delta uses standard rules and just keeps operating aircraft once they’re fully depreciated…What’s surprising to me is that they use such a simplistic method like straight line depreciation. You’d think hours on the airframe and cycles would have been used.

1) Proper economic models will project actionable amortization over time, v. your straight-line point.
2) At the tail of an airframes life, ie once ~2 std deviations of the purchase as been amortized, the larger annual cost is the amortization of the last heavy maintenance.

Differentials (factors) ranked by eyeballing importance:
1) derived average age, industry opines 22yrs

2) newTech/oldTech (kpmg discusses)

3) beginningGeneration/end-of-line (kpmg discusses)

4) narrowbody/widebody (respecting consul and correcting a misstep)
JustSomeDood wrote:
..it would be essential to divide between narrowbodies and widebodies, with the former having longer useful economic lives as they have a wider operator base.


5) stretch/shrink (imo)

6) freighter conversion utility

7) airline sophistication

8) airframer maturity

Re: KPMG postulates a 22yr aircraft economic life +/-3yrs newTech/oldTech

Posted: Wed Mar 04, 2020 8:05 am
by Sokes
amdiesen wrote:
...
Post objectives:
...
* How does aircraft depreciable life factor into elasticity of revenue?


I guess not at all. At least I don't book my flights depending on the remaining depreciable life of airplanes.


amdiesen wrote:
The topic holds relevance to the boundaries of common knowledge on the board. The post attempts to present analytical perspectives and global views of decision makers versus prescribing superficial solutions in a way that is meaningful to data driven board participants.


Did you study a social science? I'm just asking because I struggle to understand your language, which is something I usually only encounter in social sciences.

That apart I consider depreciating over 22 years not as conservative accounting. It has however the advantage of higher profits for the next let's say 12 or 15 years. Maybe management can invest these in financial derivatives?

Re: KPMG postulates a 22yr aircraft economic life +/-3yrs newTech/oldTech

Posted: Mon Mar 16, 2020 12:25 am
by amdiesen
The Boeing 789 is substantively less expensive than the A339.
The Boeing 789 and the Airbus A339 functionally serve the ~same utility.
The aircraft are similarly list priced
..price B789 (2019jan) 292.5 * 50% = 146.25
..price A339 (2018) 296.4 * 50% = 148.2

The estimated life of the B789 and A339 are 25 years and 19 years respectively.
The purchase cost is amortized using 95% of the life.
The estimated amortized cost for year one is ~12.065m and 15.959m respectively.

Differentials (factors) ranked by estimated importance:
** I've added airliner acceptance as a factor
1) derived average age, industry opines 22yrs
2) newTech/oldTech (+2/-2)
3) narrowbody/widebody/VLA (+2,-2,-4)
4) airliner acceptance mainstream/boutique (+2/-2)
5) beginningGeneration/end-of-line (+2/-2)
8) freighter conversion utility (+1/-1)

Factor estimates
B789 A339
22 22
2 -1
-2 -2
2 -2
0 2
1 0
25 19
23.75 18.05

Taking the problem one step farther; The purchase price is amortized yearly, weighting early years more heavily and later years less. Heavy maintenance events are added and amortized over their expected use in equal annual amounts. Interest/cost-of-capital is calculated on the amortized value annually. Annual amortization + HvyMaint amortization + cost-of-capital.

The formula and factors are meant to be a working rule-of-thumb. Constructive input is encouraged, however the primary thesis should hold. Think in terms of one airline making a choice, differences between airlines purchasing power is irrelevant to the perspective.

Re: KPMG postulates a 22yr aircraft economic life +/-3yrs newTech/oldTech

Posted: Mon Mar 16, 2020 8:48 pm
by heavymetal
amdiesen wrote:
The Boeing 789 is substantively less expensive than the A339.
The Boeing 789 and the Airbus A339 functionally serve the ~same utility.
The aircraft are similarly list priced
..price B789 (2019jan) 292.5 * 50% = 146.25
..price A339 (2018) 296.4 * 50% = 148.2

The estimated life of the B789 and A339 are 25 years and 19 years respectively.
The purchase cost is amortized using 95% of the life.
The estimated amortized cost for year one is ~12.065m and 15.959m respectively.

Differentials (factors) ranked by estimated importance:
** I've added airliner acceptance as a factor
1) derived average age, industry opines 22yrs
2) newTech/oldTech (+2/-2)
3) narrowbody/widebody/VLA (+2,-2,-4)
4) airliner acceptance mainstream/boutique (+2/-2)
5) beginningGeneration/end-of-line (+2/-2)
8) freighter conversion utility (+1/-1)

Factor estimates
B789 A339
22 22
2 -1
-2 -2
2 -2
0 2
1 0
25 19
23.75 18.05

Taking the problem one step farther; The purchase price is amortized yearly, weighting early years more heavily and later years less. Heavy maintenance events are added and amortized over their expected use in equal annual amounts. Interest/cost-of-capital is calculated on the amortized value annually. Annual amortization + HvyMaint amortization + cost-of-capital.

The formula and factors are meant to be a working rule-of-thumb. Constructive input is encouraged, however the primary thesis should hold. Think in terms of one airline making a choice, differences between airlines purchasing power is irrelevant to the perspective.


The 787-9 is substantially more expensive than the A330-900 in the real world.

I would also not make different assumptions about useful lives, there are too many variables that we do not know that will affect each airline or leasing company's decision to retire an airplane. I would assume these have the same useful life for the time being.