A methodology for minimizing the error in on-line Kalman filter-based aircraft engine performance estimation applications is presented. This technique specifically addresses the underdetermined estimation problem, where there are more unknown parameters than available sensor measurements. A systematic approach is applied to produce a model tuning parameter vector of appropriate dimension to enable estimation by a Kalman filter, while minimizing the estimation error in the parameters of interest. Tuning parameter selection is performed using a multi-variable iterative search routine which seeks to minimize the theoretical mean-squared estimation error. Theoretical Kalman filter estimation error bias and variance values are derived at steady-state operating conditions, and the tuner selection routine is applied to minimize these values. The new methodology yields an improvement in on-line engine performance estimation accuracy.