JOCResearch

RESIDUAL VALUE MODEL METHODOLOGY

TUTORIAL ON USE...EXAMPLES

The Model will open up to a page as represented by Chart 1 below.  The input data block is shown in the upper left quadrant.

CHART 1

In the first example, assume that you wish to analyze current values of a B737-800 manufactured in mid-1999 under different scenarios.

The aircraft type and date of manufacture (dom) are entered, as well as the required read-out date.  For output in current dollars (i.e. escalated) an inflation factor   - as it applies to manufacturer new prices - is entered.  (2.5%p.a. has been considered “normal” for the past decade although, in fact, manufacturers have raised their so-called list prices at a considerably higher rate). 

The lowest, or fifth input box is the condition or demand band you wish to assess the residual value for.  If the market were assumedto be in a very tight situation (i.e. there are no surplus young-used aircraft available, sales record for this type is robust, economics for the type is good) then one would insert – for the B737-800 – a condition of 3 (Hard).  If the medium-haul market worldwide is assumed to be in an average but relatively stable situation, and a few young-used aircraft are actually being traded, one would select a lower demand band such as 4 (Very Firm) for this type.  If the market is in recession, and there are a large number of surplus aircraft parked (but not necessarily of B737-800’s specifically) and airlines and manufacturers are laying off employees, reducing fleets and cutting back on production, then one would select demand band 6 or 7 (Fairly Firm of Softening) for this type.  If a major carrier goes into Chapter 7 bankruptcy or elects to get rid of a large fleet of a certain type (say, all of a sudden 24 to 30 B737-800’s are dumped on the market and the creditors’ requirement is to effect a quick resale or lease) then one has a glut or near-glut situation, and one would choose condition 9 (Very Soft) for the B737-800 type.

How do these conditions affect the residual value (and, therefore, the marketable lease rate) of the aircraft in question?

The top middle block shows Output Data for one answer, (as shown in Chart 2) that which corresponds to the demand band selected for the input block.   Thus, if one had selected band 9 (Very Soft) as shown, for a near-glut market condition, then the residual value (the fair market value) of this two-year-old B737-800 would be $26.4 million.  Note that the top box in the output data block shows the “Nominal Replacement Price” for the type at the date of the valuation:  In this case, the “real” manufacturer’s new price (not list price) as of June 2001 should be $47.16 million.

CHART 2

Directly below the Output Data box is a ten by four column block.  This shows, at a glance, what the residual FMV’s would be for all conditions from 1 to 10 at four different escalation factors.

Thus, going back to the scenarios laid out above, case one for a very tight market at demand band 3 (Hard) would yield a residual value of $44.4 million (only $3 million or so below the new sales price).  Comparisons are being made at 2.5% escalation.

For case two, an average but stable market condition, the result for demand band 4 (Very Firm) would be $41.4 million…another three million dollars lower than the case above.  One can get a feel for the sensitivity of RV movement as market conditions change.

For case three, recession trough scenario, the result for demand band 7 (Softening) is $35.0 million … a 15% drop below the “average” case shown above.

For case four, the near-glut scenario, the result (as already described earlier) would be $26.4 million… in this case a precipitous 36% drop from the “average” case described above.

Further to the right and below, as illustrated in Chart 3, the analyst can review a matrix which shows for one demand condition only at a time, the full spectrum of residual values for this type (or any type input) for past, current and future dates of manufacture (dom) versus past, current and future dates of residual value observation.  One can change this matrix for any demand band and any escalation factor by changing the entries to the input data block.  The matrix is extremely useful for quickly assessing the rapidity of probable change/s to residual value (of a type) for swings in world economic cycles and market demand situations.

 CHART 3

Additional tutorial examples will be added to this description from time to time.  Note that one can input older type/s; say, manufactured in the mid 1980’s, and print out the residual values as projected by the Model for the 1990’s (selecting the demand band conditions one determines to have been appropriate for the cycle/s experienced) and compare those results with the appraised market “actuals” (as listed by several appraisers in various financial documents). 

The JOCR model page contains five tabs at the bottom (lease rates; inputs; calculations; JOCR data; JOCR curves). The lease rates' data shown are for the demand band condition selected for the Input block on the input tab page. Except for the first year - or year of manufacture - new aircraft (which list the same lease rate/s for all demand band conditions). For further illustration of lease rates' analysis and projections, see Methodology Development (page 13 and last three charts).