Operating lessor Aircastle believes "important distinctions" have been missed in the market talk about shorter useful lives of commercial aircraft and the possible impact on residual values.
"There has been a great deal of market commentary recently about useful lives and residual values as there tends to be during challenging economic circumstances, but we believe two important distinctions have been lost in the discussion of these accounting measures," says Aircastle's chief executive officer Ron Wainshal on a third earnings call.
According to Wainshal, the useful life of an aircraft and the residual value estimate are "rough approximations" done on a fairly generic basis, "often early in an aircraft's life".
"These estimates are not supposed to be skewed either too high or too low," he says. "We, and other lessors, must reassess these estimates periodically and, if such, some level of impairment is to be expected overtime particularly during business slowdowns."
Likewise, he says if the residual estimate "turns out to be conservative" or if "market conditions are robust", sales will generate gains as Aircastle has seen "on numerous instances".
Also, Aircastle believes that the useful life of an aircraft is driven by its position in the production life of the platform.
"Aircraft produced towards the end of the production run will likely have shorter lives. It is not just an aircraft's age that matters."
As an investor, Aircastle says it is focused on the capital efficiency of its assets and whether it makes sense "financially to continue to re-invest in an aircraft, or dispose of it, no matter the age or residual value for book purposes."
The lessor points to its early lease termination with a customer in Turkey for two 21-year-old Airbus A320s with "older generation" engines, "even if the aircraft are still four years shy of their 25th birthdays."
According to Wainshal, all four engines were due shop visits "imminently" and re-investing the cash maintenance reserves "would help, but made no economic sense".
The lessor impaired these aircraft in the quarter, and recorded $11 million in maintenance revenue.
"We expect to complete the part-out of sale of these aircraft in Q4 for an amount roughly equal to the reduced net book value," he says.