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Ascend Consultancy Weekly Team Perspective: Diminution in aircraft value and some widely held misconceptions
The purpose of Aircraft Diminution in Value due to damage is to provide the claimant with a form of compensation for an incident which may affect the re-sale value of the aircraft.
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By Anthony Brooks – Senior Analyst – Certified Civil Expert Witness, Cirium Ascend Consultancy
Diminution in Value is defined as “the calculation of damages in a legal dispute” and describes a measure of value lost due to a circumstance or set of circumstances. Where aircraft are concerned, this usually refers to an incident where the aircraft has suffered damage of some nature. The purpose of Aircraft Diminution in Value due to damage is to provide the claimant with a form of compensation for an incident which may affect the re-sale value of the aircraft.
We all see regular articles and news stories where aircraft sustain damage from airport vehicle collisions, during maintenance or even incidents on the production line.
Over the last 20 years we have provided reports involving aircraft which have been involved in a wide variety of incidents at different stages of operation or production.
Operational status of aircraft at point of incident Cirium Ascend Consultancy diminution in value cases
In fact, In the cases that we have been involved in to-date, over 80 percent have involved an aircraft not in operation at altitude. These include 36% involving a stationary aircraft (largely those involved in airport vehicle collisions), 27% have occurred on the production line at different stages of construction and 18% whilst in maintenance.
Misconceptions
One broadly held misconception is the view that when damage to an aircraft occurs, the cost of the repairs equates to the Diminution in Value and is paid out by the insurer. The repair cost in fact is totally separate from any potential loss in value due to damage history and is usually settled fairly quickly by the insurance company. A Diminution in Value claim can take years to settle through the Court or Arbitration process if not agreed at an earlier stage.
Another widely held view is that even though an aircraft is repaired back to a condition pre-incident and, in some cases, resulting in it being in a better condition than before, that there should therefore be no loss in value. One can also argue that this should also be the case where a damaged area is replaced with brand new components rather than instigating a repair. Unfortunately this is not always the case.
Damage history can be a bargaining lever in negotiations between a buyer and seller.
Even if there are no ongoing special inspections instigated as a result of the damage (which itself can sometimes seriously affect its value) a perception issue can remain with the aircraft over its lifetime. Damage history can be a bargaining lever in negotiations between a buyer and seller, the strength of which can depend on several factors, one being the market conditions at the time of the incident. In a situation with low availability the seller’s bargaining power will be greater as the buyer has less aircraft to choose from whereas in a market with high availability the buyer will have a higher choice of undamaged aircraft to choose from and so the seller may have to offer a larger discount due to the damage in order to sell the aircraft.
Look out for a Viewpoint article later on this year where I will be explaining the Diminution in Value subject in more detail including its purpose within the aviation industry, we’ll outline some more of the factors we analyse which determine to what extent, if any, a Loss in Value exists and we’ll also look at the methods used in dispute resolution.
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