The Impact of Damage
TASA ID: 4642
Most legal cases I am involved with fall into two general categories. The first involves the fairly straightforward appraisal report for divorce cases wherein an aircraft needs to be appraised as part of the settlement or the appraisal is needed for the attorney's client who is purchasing an aircraft and the market value is required for financing. The market value may also be needed as an integral part of the initial Purchase Agreement or in negotiating the price itself. While these appraisal situations are fairly routine projects for me, I am always surprised to hear the attorney hiring me state that I was the only one who physically examined the aircraft and its records when developing my opinion of value. This is a good point to mention that in my case, all signed appraisal reports clearly state that I physically examined the aircraft and records along with statements that I am disconnected from the aircraft, the deal and so forth. Unfortunately, this is not true for all aircraft appraisal reports from other "appraisers."
The second category involves cases related to the diminution of value after an accident or incident - and this category is the focus here as there are generally two very different viewpoints which are presented in these types of cases. One general viewpoint is that there is no diminution of value whatsoever related to the event in question (and this opinion may, in fact, be true) and the other viewpoint is that the aircraft is now unairworthy or the diminution of value is a very high percentage of the overall value as a direct result of this one event (a very rare situation but very possible too). Which opinion/viewpoint is correct and how would any diminution of value be determined? While each situation is unique and involves research, there is no one answer that fits all circumstances even though the evaluation process itself is essentially the same.
When aircraft are involved, damage history is probably the most misunderstood, miscalculated and overlooked item; and the reasons vary. There tends to be a general fear from those not involved with aviation that the "damaged" aircraft may break up in flight or the repairs will result in continued maintenance problems. The reality is that aircraft which have been damaged and properly repaired will have no more problems than any other aircraft of the same make and model - especially if the aircraft has been flown within its performance envelope for any period of time. Unfortunately, feedback from the marketplace tends to place a financial penalty against previously damaged aircraft which is the diminished value in question. The magnitude of that penalty depends on a number of factors that most evaluators do not take the time to research and analyze nor do they really have the data and background to do so. Let's look at one example that involves a very real damage scenario and how evaluation problems or differences of opinion can occur and what the impacts (pardon the pun) of this incident will be if handled properly and improperly.
Imagine for a minute that a pilot/owner is returning to their home base with their aircraft after routine repairs and updates. The activity involved a new paint job, a new interior and a set of avionics equipment (communication and navigational equipment). In this example, the owner/pilot lands the aircraft and has an inadvertent prop strike (the prop hit the runway, a taxiway light or even a parking marker) but; otherwise, the aircraft itself is not damaged. What is the impact of this event to the future value of the aircraft - in other words, its diminished value? The answer to this question depends on the actions the owner/insurance company take along with details of the event itself and field research is a key component here.
To understand diminished value and how damage is calculated, it is important to first understand how aircraft in general are typically evaluated - or misevaluated in damage scenarios. The most common tool used in this industry to evaluate an aircraft is one or more publications/websites. There are a couple that are on the market and available to just about anyone. The problem with these publications is that the publisher is in the business of selling subscriptions and not appraising aircraft meaning that the publisher is not responsible for the quality of the published information itself (how closely the information tracks to actual sales), who uses it and/or how it is used. Furthermore, the publications generally do not address damage in an analytical manner but more importantly, they do not address all of the value points on an aircraft independently which can lead to incorrect conclusions and opinions of value. After all, the published guides are meant to be general guides only (per their disclaimer) and should not be used to appraise a specific aircraft - even though individuals use them routinely for that sole purpose. To be clear, value points are items such as the condition of the paint, the condition of the interior, the condition of the airframe, a complete inventory of avionics, and other components that together make up the total market value of the aircraft in question. For example, in one guide, the airframe and the paint are linked together, so it would be impossible to properly evaluate a bad airframe with a great paint job or vice versa. One method that is commonly used by these guides (or the evaluator) to assess the impact of previous damage is to deduct a certain percentage from the overall value of the aircraft.
There are typically no guidelines regarding the exact percentage to be deduced meaning that the specific percentage used is subjective and based on the evaluator's criteria along with the relationship the evaluator may have to the aircraft or the transaction - if any. In our prop strike example, the use of a flat percentage would mean that a portion of the brand new paint, interior and avionics would be impacted by a flat percentage deduction even though these items were not involved in the incident at all. This percentage deduction and thinking would also extend forward in time to avionics equipment that hasn't even been manufactured at the time of the event, along with any other future modifications or improvements to the aircraft! But let's complicate this example a little further and take the engine out of the aircraft in question, have it overhauled by the factory (zero timed), and place it on another aircraft. Will there be a deduction on the other aircraft (the answer from many evaluators is usually "no") and will we eliminate the deduction on the first aircraft (again the answer is usually "no")? After all, it is the same engine isn't it? What if the owner elected to purchase a brand new engine and prop instead of having the existing ones repaired? Would a flat percentage still be appropriate? One of the better known publications stopped addressing diminished value assessment several years ago because there were too many items to consider in a damage event and quite frankly their straight percentage approach did not pass muster for many of the reasons previously stated. Their recommendation was to have the aircraft professionally appraised. Unfortunately, the aircraft appraisal industry is unregulated so anyone can claim to be a "professional aircraft appraiser" without any background or training making the resolution of the appraisal problem questionable if the objective is to provide a reliable, creditable opinion of value. The other issue of course has to do with obtaining creditable, reliable market data (actual sales data); and there is no public database of aircraft selling prices; meaning that most evaluators have only the websites or publications to fall back on for their analysis.
To solve the questions of diminished value, research is needed, along with an analysis of the related repairs. As I mentioned earlier, it is important to note that diminished value is really a market perception of past damage since most repairs are performed to the manufacture's maintenance standards and generally hold up well over time - mechanically speaking. For example, if it were possible to have two identical aircraft (avionics, time on the airframe, etc.) and one of these aircraft had a history of damage, the aircraft with damage history would not be able to command as high a price as the undamaged aircraft - all other factors being equal. This concept makes sense to many. The exact magnitude of this perception is where research and analysis are needed. The damage history and resulting diminished value is going to be a result of the previous damage incident (in other words, how extensive was the damage and what was repaired or replaced, were the parts new, used or repaired) and this information is then examined in relation to the present condition of the airframe. Remember, the condition of the airframe is not really addressed as a separate item in any publication. For example, an aircraft with minor or superficial damage history will show relatively little financial impact on an airframe that has no corrosion, no dents, dings or deformations, etc. but this same level of damage tends to have a much larger financial impact on an airframe that is extremely corroded, or comprised of multiple dents on the leading edges or generally in "below average" condition. This is why it is so important to use an evaluation method that examines each value point independently of all others - especially the airframe. The evaluation method used should also review the available repair and maintenance records to determine who did the work, what parts were used and what standards were followed. Any other effort is simply "smithing" numbers more than an attempt to properly appraise the aircraft and provide a creditable, reliable opinion of value that can be substantiated.
To complicate matters further, some evaluators will claim that if there is no paperwork on file with the FAA (commonly called a 337 form) then the aircraft incurred no damage. Others will claim that the aircraft was sitting still when something hit it and; therefore, no damage event occurred but both scenarios are an attempt by the evaluator to avoid putting a number to an issue that may be very clearly documented otherwise. While it would be great to have a 337 form on file with the FAA for all repair work, not all shops are required to complete these forms even though there may be a very clear indication of repair efforts or related damage in other records. One example involves FAA Authorized Repair Stations which are not required to file 337s with the FAA for all repairs. Also consider the aircraft which is tied down on the ramp when a wind storm develops and another aircraft or a piece of debris is thrust into it. It is somewhat ridiculous to think that no damage really occurred and the shop repairing the aircraft certainly has a very different opinion.
Now let's examine our prop strike example again. In this case, we have presumed that the airframe is not damaged and the only impact is to the engine and prop, and these have been repaired or replaced. If the aircraft is professionally appraised by someone who has been properly trained and who physically examined the aircraft and its records, the appraisal method should take all value points into consideration. In this specific example, the diminished value should be $0. Why? Let's examine the value points in question. The prop hub has been overhauled and the blades have been replaced - or the prop may have been replaced altogether. The engine has been torn down, examined and reassembled - possibly even overhauled or replaced. Therefore, the prop value will show a fairly recent overhaul/replacement time and the engine will be evaluated as being torn down, examined and reassembled or recently overhauled noting the reason - or new engine logs will be examined (in the event of a new or 0 timed engine) that do not address this event at all. Unless the airframe has been damaged in the past, or receives damage as a result of this incident, or has missing log books, no diminished value should be assessed as a result of this prop strike example alone.
Other situations involve a damage event wherein new components were used and the quality of repairs is professional in nature but one party now claims that the aircraft's diminished value is some large percentage of the aircraft's overall value - and they have a number of "reports" to support their claim. In these types of scenarios I find the reasoning and analysis to be a little "cloudy." As I stated earlier, the aircraft appraisal industry is unregulated and this situation also applies to the appraisal reports in that there are no reporting standards, so any number on a piece of paper is essentially an "appraisal report." The Uniform Standards of Professional Appraisal Practice (USPAP) is a great set of guidelines; however, there is no requirement under USPAP wherein the property under consideration must be physically examined as part of the appraisal process. I bring these points up because when reviewing other reports as part of my analysis, I look for a few basic items such as - did the appraiser leave their office to look at the aircraft and its records? Is the report signed? What is the market data source they are using and how did they arrive at their opinion/conclusion? Does this report meet any industry-recognized standard/guideline? Along with a few other questions of course. What I find is that the reports are usually only one to two pages long and have very little detail in their analysis of the subject aircraft or its records. This is due to the evaluator NOT leaving their office to turn one page of the log books or examine one rivet on the airframe. The result is that they tend to miss other key value points (both positive and negative) because the evaluator tends to be focused on a particular outcome more than the whole aircraft and how the incident in question impacts the overall opinion of value.
In one recent case, the operator of a business jet asked me to evaluate the diminished value of the aircraft resulting from a damaged wingtip. The bank leasing the aircraft stated that the operator was on the hook for millions in loses due to this one event and they had several reports to support their position. When I examined the subject aircraft, the airframe showed no obvious sign of repair. However, the log books not only documented repairs to the wingtip in question but also repairs to the other wingtip from a similar incident. According to the log books, all replacement parts were new and all repair efforts were in accordance with the manufacturer's repair manual. It was true; however, that the aircraft did lose millions in value since it was initially leased BUT the losses were NOT due to this single event as the financial impact was only a few thousand dollars in this specific situation. Most of the loss in value was due to the market collapse in 2007 & 2008 (the aircraft's lease was dated prior to 2007 when all aircraft values had generally peaked - including new aircraft) so it was unclear how the bank rationalized their position. The other "reports" the bank submitted never addressed repairs to the other wingtip nor did they address the overall market trends because there was essentially no research on the part of those evaluators, as no one else ever physically examined the aircraft or its records nor did they take a few minutes to analyze any market trends for that specific make and model! Needless to say, the bank did not recover the millions they were seeking.
My point here is that evaluating any aircraft is not as simple as looking up a number in a book or on a website and then applying a few percentage points to arrive at a number. There are many factors that go into the final analysis of the aircraft's market value and additional dynamics can complicate this analysis. Damage history is one of them. Others include missing log books, airframe/engine modifications and the type of overhaul an engine receives just to name a few. In addition, an aircraft cannot be properly appraised without research which includes physically examining the aircraft, inventorying its contents and examining its records. The use of current market data is also critical if the objective is to provide a creditable, reliable opinion of value. Although a damage event is not something that any aircraft owner looks forward to, understanding the impact on the aircraft's market value is important anytime the aircraft's value is in question.
This article discusses issues of general interest and does not give any specific legal or business advice pertaining to any specific circumstances. Before acting upon any of its information, you should obtain appropriate advice from a lawyer or other qualified professional.
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