Lessor investment models may need a more aggressive depreciation outlook in light of arguments pertaining to the economic life of aircraft, according to Rob Morris, senior analyst at Flightglobal advisory service Ascend.
This move will have an impact on lease rates and/or lessor returns of aircraft, said Morris during the Ascend 2020 Webcast: 2013 the year of the Snakes (and Ladders) today.
The age at which aircraft are being retired is actually "irrelevant", he says, the more important point today is the rate at which aircraft are being depreciated. Also important is the book value of an aircraft at any point in time relative to its market value.
On a standard 25-year to 15% depreciation curve at 15-years, the book value will still be around 50% of the original value, says Morris.
"The aircraft types parting out early are all judged by Ascend to be some way below this depreciation line at time of retirement, although recognise this is current market data, so nominally half-life," he says.
This issue is "clearly being recognised by operating lessors" with several of the public companies booking impairment charges against a number of aircraft in 2012 and more of the private companies "no doubt" doing the same, he says.
"And indeed it's not just lessors, Singapore Airlines took S$10.6 million in additional depreciation expense in its latest quarterly results, as the useful lives and residual values of certain aircraft were reduced," he adds.
Morris notes for many operating lessors and aircraft owners "caught in this value dichotomy" maintenance reserves represent the opportunity to return value to the aircraft.
"But investing the reserves into maintenance often will make little economic sense since the lessor remains exposed to the risk of placing the aircraft at reduced rentals with weak credits on poor jurisdictions in today's market."