The fundations for asset value modelling.

Financial theory holds that the value of any asset is a function a number of related factors:1. The stream of benefits the owner of the asset expects to receive.2. The timing of the receipt of those benefits. 3. The risk borne by the owner.Cash flow.Since cash generation is the basic measure of command over the primary means of production, it is ultimately the cash flow to the business that affects its welfare, and therefore, its value. Control over the cash flows determines who controls the goods and services. The stream of benefits is analyzed from a cash flow point of view, defined as the the net income of the firm plus depreciation and other non-cash charges. Cash flow timing. Since current consumption has greater value than the same level of future consumption, the timing of the cash flows affects the value of the assets. Cash flow uncertainty. Since a business cannot be absolutely certain of receiving future cash flows, an element of uncertainty risk must be incorporated into any valuation model. These risks include:1. Inflation risk as it relates to the changing purchasing power associated with consumption patterns. .2. Business risk in terms of being able to find a buyer if the investor wants to transfer ownership rights. 3. Marketability risk related to the uncertainty the business faces regarding product acceptace, financing cost and product costs. Investor behaviour.For an investor to give up current consumption, the investor must be compensated for the uncertainty risk of future cash flows. In pricing transaction equity, the investors factors in:1. The current market value of equity.2. Dividend payment for each time period.3. The investor's required rate of return.4. The expected long term growth rate.The present value model pprovides the theoretical basis for the earnings and/or earnings capitalization. More complex expressions of value can be constructed to consider cash flow, timing and risk considerations. Aircraft valuation approaches.Definition of market value, cost & income. Definitions of valuation, appraisal, and market value change over time and definitions vary by country. Reference should be made to the applicable valuation standards in the valuation report. It should consider:1. The ongoing firm assumption.2. Surplus capacity or scarcity of supply and the validity of the balance sheet identity. 3. Aircraft productivity.4. Asset Residual value.5. Systems components on the landing gear, hydraulic pumps, valves, actuators, and othe rcomplex sysyems. 6. Quality of maintenance - airframe.7. Quality pf maintenance - engines.8. Damage history.9. Overstress due to hard landings. 10. Corrosion status.11. Modification status.12. Completeness and continuity of records. 13. Age and base value. 14. Replace, reproduction, liquidation cost.15. Analysis of residual value techniques.16. All valuation approaches must be considered, market, income and cost, and one selected.17. The three methods for business valuation are asset valuation, capitalized income and securities (Stock & debt) market valuation.18. Market valuation relies on the efficiency of values determined in the financial markets 19. If no comparibles are available the appraiser can select another approach to appraisal. 20. The appraiser builds up an aggregate market value by appraising the individual assets. 21. The capital income method differs from the others in that the analyst determines asset value by making a forecast of future net cash flows received from the use of the business's assets.22. If the cost approach is selected consider:23. Economic rent or lease rate (interest).24. Aircraft specification & condition factors.25. Income stream uniformity or lack thereof.26. Interest rates (cost of funds).27. Price comparibles.28. Specification or bespoke configuration.

Aircraft value considerations for technology that has yet to be type certified.

A good place to start maybe to identify "undisputed facts" that have been evaluated in court cases and can be layered over the pricing, trading and financing practices widespread in the aircaft market:1. The courts recognize that Appraising is an inexact science.2. Estimate of value is an opinion and can be evaluated by an opinion.3. The courts recognize that two or more reputable appraisers may disagree as to market value.4. A judgement of the court with respect to an appraisal is based on a preponderance of the evidence. 5. It is not possible to state as a fact how long an asset will last.6. There is no way to prove percentage of depreciation except as opinion.7. There is no way to predict accurately the rental/lease income into the future.8. No one is expert enough to know what an asset may sell for at a particular time. 9. No appraiser should consider their opinion as infallible.10. Opinion of market value is what the appraiser thinks the aircraft is worth and no one really knows the exact value of appraised assets.11. Where more than one appraiser is appraising, rather than averaging the approaches, the appraiser makes a judgement call to select the approach that they deem most applicable to the appraisal situation.12. All appraisals should be updated between 1-6 months periods.13. The appraiser speaks as of the date of the appraisal and no other. 14. No appraiser can foresee what the economy is going to do.15. Appraisals are a projection and an estimate of value as of the date of the appraisal.The valuation framework should be fine-tuned for new aircraft technology, especially with respect to methods of manufacturing, the internet of things as applied to aircraft and post-new cyber security, incidents and accidents. Such an appraisal process will take many years to take shape.

Market pricing data for unknow technologies.

An effective way of developing a value profile that takes accounts of things that are unknowable today, is to create pricing data bases by liberalizing the aircraft trading market, to include requirements for the publication and independent validation of the value of aircraft transactions. Consideration should be given to the establishment of a trading floor, like those that trade commodities.
The conundrum for the aviation industry, is that keeping new and used aircraft prices secret to protect the trade secrets of manufacturers, requires lenders, investors, insurers, traders, appraisers, tax authorities and the courts to rely on unknown asset risk value profiles, which will not take shape for a decade or more. This will affect the value of warranties and care and maintenance costs. The aircraft market cannot function without risk takers. The global economy cannot function without a robust air transportation system. They are not mutually exclusive.

Pricing in risks originating from emerging technologies.

The risks and impacts of new aircraft on product-safety legislation, may not cover new ones originating from emerging technologies. For now, it is impossible to assess and scale any negative effects on safety and the level playing field for new and used aircraft. Accidents might undermine trust in new technologies especially as they transition into the used aircraft market.
Concerns already exist with respect to human-robot collaboration, cyber-safety exposures in connected aircraft, and software, which may change aircraft functionality. Many question the lack of requirements for operating autonomous machines (ones with no flight crew) (drones).
Concerns may arise concerning the lack of requirements for aircraft control mechanisms, in terms of machine learning capabilities and behavior predictability.
The integration of completely new aircraft designs requires a regulatory framework that covers:1. New materials and methods, because they required to be consistent with a universal regulatory framework, yet undeveloped.2. Regulations will have to be put in place for ensuring the safety of parts, systems and subsystems, hardware and software.3. Regulations for aircraft parts manufacturing and aircraft assembly that will use new materials and methods of production such as artificial intelligence (AI).4. The safety and legal liability implications of AI, the internet of things and robotics.5. The need to ensure consistency of AI standards with existing product-safety legislation.6. Conformity assessment procedures that address safety and, care and maintenance, over the aircraft life cycle.7. Expanded enforcement of new legislation through aligning changes with the current treaty, legislative and regulatory frameworks.8. Regulation changes to reduce transitioning costs. 9. Revision to regulations based on (a) a proposal for a regulation, taking account of the impacts of new technologies, (b) improve legal clarity of the current regulatory provisions, (c) reduce certain costs for companies and (d) ensure better coherence with each ICAO member State framework for aircraft type certification. 10. The business side, of the aircraft market will need a level playing field with respect to R&D funding from governments, based on agreed:a. Problem (project) definition. b. Completed in line with the 'evaluate first' principle.c. Risk definition concerning emerging technologies.d. Production of and simplification of the documentation (paper vs digital formats).Then there is the question of how new technology aircraft will be priced ex the factory, published prices, discount practices, depreciation/amortization for accounting purposes, values such as current, future, residual, insurance, repair, rebuild, replace, remake over the life cycle, how long that cycle will be, end of life conversion to other applications, storage and care and maintenance.

Asset valuation model inputs.

Asset valuation model inputs.The amount, timing and riskiness of future cash flows incorporated into the valuation model are:1. Current value of the asset.2. Future cash flows over the life of the asset.3. The discount rate capturing the weighting of benefits for postponing consumption and accepting risk.4. The number of periods of time over which cash flows will be received.